This  I 


LU 


FOREIGN   EXCHANGE   EXPLAINED 


THE  M  ACM  ILL  AN   COMPANY 

KEW  YORK    •    BOSTON    •    CHICAGO  -DALLAS 
ATLANTA  •    SAN    FRANCISCO 

MACMILLAN  &  CO.,  Limited 

LONDON   •    BOMBAY   •    CALCUTTA 
MELBOURNE 

THE  MACMILLAN  CO.  OF  CANADA,  Ltd. 

TORONTO 


FOREIGN    EXCHANGE 
EXPLAINED 


A  PRACTICAL  TREATMENT  OF  THE  SUBJECT 

FOR   THE   BANKER,   THE   BUSINESS 

MAN,  AND  THE   STUDENT 


BY 


FRANKLIN    ESCHER 

SPECIAL  LECTURER  ON   FOREIGN   EXCHANGE 

AT   NEW  YORK   UNIVERSITY 

AUTHOR  OF   "THE  ELEMENTS  OF  FOREIGN   EXCHANGE," 

"PRACTICAL  INVESTING,"   ETC. 


Neto  2farft 

THE  MACMILLAN   COMPANY 

1920 

All  rights  rturvtd 


Copyright,  1917, 
By  THE  MACMILLAN  COMPANY. 


S«t  up  and  electrotyped.    Published  October,  1917. 


Nortnooti  tyxtsa 

J.  S.  Cuahing  Co.  —  Berwick  &  Smith  Co. 

Norwood,  Mass.,  U.S.A. 


HO 


.RLtACE 

To  a  very  large  number  of  people  who  ten  years  ago 
had  never  even  heard  of  a  gear  or  a  differential  or  a 
carburetor,  these  are  to-day  familiar  terms.  To  an 
equally  large  number  of  persons,  perhaps,  such  phrases 
as  "demand  sterling,"  "cables,"  "dollar  drafts,"  etc. 
have,  during  the  past  few  years,  come  to  have  a  very 
definite  and  important  meaning.  Knowledge  of  foreign 
exchange  used  to  be  regarded  as  something  of  a  luxury. 
It  is,  to-day,  not  far  from  being  a  necessity. 

To  supply  the  need  for  a  book  from  which,  without  too 
great  effort,  the  student,  the  business  man,  and  the 
banker  could  get  a  working  knowledge  of  the  subject, 
the  writing  of  "Foreign  Exchange  Explained"  was 
undertaken.  To  set  down,  not  a  mass  of  figures  and 
calculations,  of  interest  only  to  the  exchange  expert  and 
obsolete  almost  as  soon  as  compiled,  but  rather  a  clean- 
cut,  definite  description  of  foreign  exchange  and  of  the 
underlying  and  unchanging  principles  on  which  it  works 
—  that  has  been  the  author's  aim.  So  to  state  the 
theory  of  the  thing  as  to  make  it  applicable  to  everyday 
practical  use  —  that  has  been  his  constant  object. 

If,  in  the  attainment  of  this  object,  there  has  been  any 
measure  of  success,  it  would  seem  perhaps  as  though  that 
were  due  to  the  fact  that  the  author's  practical  expe- 


vi  PREFACE 

rience  in  foreign  exchange  has  been  supplemented  by 
years  of  lecturing  on  the  subject  at  New  York  Univer- 
sity, during  which  time  exceptional  opportunities  have 
been  afforded  to  find  out  just  what  the  man  in  the  street 
wants  to  know  about  foreign  exchange  and  what  he 
needs  to  know. 


CONTENTS 

CHAPTER  I 

PACE 

Introductory i 

Foreign  Exchange,  what  it  is.  —  How  payments  between 
countries  are  made.  —  Function  of  the  foreign  exchange 
banker.  —  The  rate  of  exchange  between  two  points  deter- 
mined by  conditions  at  both  points.  —  The  "see-saw"  prin- 
ciple in  exchange. 


CHAPTER  II 

Pars  of  Exchange 7 

What  the  par  of  exchange  between  any  two  countries  is  and 
how  it  can  be  found.  —  Weight  and  fineness  of  coins.  —  In- 
fluence of  the  mint  par  on  the  rate  of  exchange. 

CHAPTER  III 

International  Banking 10 

Sterling  the  one  international  currency.  —  Balances  carried 
by  foreign  banks  in  London.  —  The  London  discount  market. 
—  The  new  discount  market  at  New  York.  —  Financial  con- 
fidence a  plant  of  slow  growth.  —  The  volume  of  business  in 
sterling  as  compared  with  other  currencies. 

CHAPTER  IV 

Sources  of  Supply  and  Demand 15 

Supply,  I.  Merchandise  exports.  —  Supply,  II.  Exports  of 
securities.  —  Supply,  TIL  Foreign  loans  to  this  market.  — 
Supply,  IV.  International  services  rendered  by  us.  —  Demand, 
I.  Merchandise  imports.  —  Demand,  II.  Imports  of  securities. 


viii  CONTENTS 

PAGS 

—  Demand,  III.  Repayment  of  foreign  loans.  —  Demand,  IV. 
Interest  and  dividend  remittances.  —  Demand,  V.  Interna- 
tional services  rendered  to  us.  —  Demand,  VI.  Remittances  by 
resident  foreigners. 

CHAPTER  V 

The  Rise  and  Fall  of  the  Exchanges 35 

Merchandise  exports  and  imports  the  primary  factor.  — 
Bills  sold  for  future  delivery.  —  Security  purchases  and  sales 
and  their  powerful  influence  on  the  exchange  market.  —  Influ- 
ence of  the  making  of  short  loans  to  this  market  and  of  their  re- 
payment. —  The  stabilizing  influence  of  "  Futures."  —  Interest 
and  dividend  remittances. 

CHAPTER  VI 

Principal  Rates  of  Exchange 33 

The  rate  of  exchange  at  New  York  on  London,  Paris,  and 
Berlin  illustrated  and  explained. 

CHAPTER  VII 

The  Different  Kinds  of  Bills  of  Exchange  —  Bankers'  and 

Commercial 38 

Definition  of  terms  used  in  the  exchange  markets.  — 
Bankers'  "cables"  and  short  bills.  —  Bankers'  long  bills. — 
Commercial  bills,  clean.  —  Commercial  bills,  documentary.  — 
Documents  for  "acceptance."  —  Documents  for  "payment." 

—  The  two  classes  of  bills  compared. 

CHAPTER  VIII 

Price   Relationship  of  the  Different  Kinds  of  Bills  of 
Exchange 47 

The  element  of  credit  in  bankers'  and  commercial  bills. — 
"Prime"  bills  and  others.  —  How  the  difference  between  the 
price  of  short  bills  and  long  bills  is  figured.  —  The  movement, 
in  a  fixed  relationship,  of  the  price  of  all  the  different  kinds  of 
bills  of  exchange. 


CONTENTS  ix 

CHAPTER  IX 

PAGE 

The  Foreign  Exchange  Market 54 

How  and  where  bills  are  actually  bought  and  sold.  —  The 
foreign  exchange  "banker."  —  The  exchange  "broker."  — 
"Dealers"  and  the  function  they  perform.  —  New  York  in  its 
relation  to  the  other  American  foreign  exchange  markets. 

CHAPTER  X 

Relationship  of  Our  Own  to  the  Foreign  Money  Markets      58 

The  American  market  a  chronic  borrower.  —  Why  this  is  so. 

—  London's  peculiar  lending  facilities.  —  International  loans 

and  "Free"  gold  markets.  —  Six  per  cent  in  one  market  and 

four  in  another. 

CHAPTER  XI 

The  Influence  of  Money  Rates  on  the  Exchange  Market  64 
The  way  in  which  the  money  market  affects  exchange  rates 
illustrated  by  the  concrete  example  of :  (1)  A  rise  in  money  rates 
at  New  York.  (2)  A  decline  in  money  rates  at  New  York. 
(3)  A  rise  in  money  rates  in  London.  (4)  A  decline  in  money 
rates  in  London. 

CHAPTER  XII 

Gold     ............      70 

What  makes  gold  move  internationally.  —  Gold  in  its  rela- 
tion to  trade  balances.  —  The  market  for  gold  in  the  U.S.  —  In 
Great  Britain.  —  Gold  exports  and  how  they  are  figured.  — 
Gold  imports  and  how  they  are  figured.  —  Gold  movements 
which  involve  more  than  two  markets. 

CHAPTER  XIII 

Bankers'  Long  Bills 84 

The  theory  on  which  long  bills  are  issued.  —  What  makes 
them  possible.  —  The  ability  to  draw  and  sell  long  bills  a  privi- 
lege seldom  abused.  —  Influence  of  the  discount  market  on 
the  drawing  of  long  bills. 


CONTENTS 


CHAPTER  XIII     (continued) 

PAGB 

Bankers'  Long  Bills 88 

Bills  drawn  in  the  regular  course  of  business.  —  Against  non- 
discountable  commercial  bills.  —  Against  "Futures." 


CHAPTER  XIII     (continued) 

Bankers'  Long  Bills 91 

Bills  originated  in  the  process  of  loaning  foreign  money  in  the 
American  market.  —  How  such  loans  are  made.  —  The  "risk  of 
exchange."  —  When  assumed  by  the  borrower  and  when  by 
the  lender.  —  Cost  of  borrowing  money  abroad.  —  Renewals 
and  how  they  are  effected.  —  Advantages  of  borrowing  in  a 
foreign  market.  —  Special  considerations. 

CHAPTER  XIII     (continued) 
Bankers'  Long  Bills 102 

Finance  bills  and  the  theory  on  which  they  are  issued.  —  Bills 
issued  to  pay  for  the  purchase  of  securities.  —  Bills  issued  to 
take  advantage  of  the  movement  of  exchange.  —  Bills  issued 
for  capital  purposes. 


CHAPTER  XIV 

Import  and  Export  Credits 108 

The  bankers'  credit  an  authorization  to  draw. —  The  workings 
of  a  credit  illustrated  by  an  actual  transaction  carried  through 
its  successive  stages.  —  The  credit  and  the  price  of  the  goods. 

—  The  merchant's  "line."  —  Issuing  and  confirming  the  credit. 

—  When  issued  in  dollars  and  when  in  pounds  sterling.  —  How 
the  shipper  uses  the  credit.  —  Acceptance  of  the  shipper's  draft 
by  the  bank  in  London.  —  The  documents  sent  to  New  York. 

—  Terms  on  which  the  bills  of  lading  are  delivered  to  the  im- 
porter. —  Trust  receipts.  ■ —  Special  arrangements  between 
banker  and  client.  —  Prepayments,  various  bases.  —  Low  cost 
of  bankers'  credits. 


CONTENTS  xi 

CHAPTER  XIV     {continued) 

PAGE 

Import  and  Export  Credits.  —  Special  Forms      .  .        .     137 

Case  where  the  buyer  of  the  goods  cannot  or  will  not  furnish 
a  bankers'  credit.  —  Seller  himself  secures  authorization.  — 
The  banker's  protection.  —  Remittance  of  proceeds.  —  Usance 
of  drafts  drawn  under  such  credits.  —  Credits  that  call  for  cash 
payments. 

CHAPTER  XV 
Dollar  Credits 147 

Increase  in  the  use  of  credits  drawn  in  dollars.  —  Advantages 
over  sterling  credits.  —  Elimination  of  exchange  conversions. 

—  Commissions  saved.  —  Operation  made  easier.  —  The  future 
of  dollar  credits  a  question  of  ours  versus  the  foreign  discount 
markets. 

CHAPTER  XVI 

Dollar  and  Other  Drafts  on  Foreign  Points      .        .        .     155 

Collection  of  drafts  drawn  without  banker's  authorization. 

—  Interest  and  charges  usually  paid  by  buyer  of  goods.  — 
Dollar  drafts  on  foreign  countries  paid  in  local  currency  but 
remitted  for  in  dollars.  —  How  the  rate  of  exchange  is  fixed. 

CHAPTER  XVII 
Profit  Possibilities  in  Foreign  Exchange  ....  162 
Is  the  exchange  business  profitable  ?  — ■  Principal  operations 
of  the  foreign  exchange  department.  —  Selling  cables  against 
cables,  demand  against  demand,  etc.  —  Selling  cables  against 
demand,  demand  against  long,  etc.  —  Three-market  opera- 
tions in  exchange,  —  arbitrage.  —  What  makes  such  opera- 
tions possible.  —  The  speculative  element  in  exchange  deal- 
ings. —  Profits  vs.  risks. 

CHAPTER  XVIII 

The  Silver  Exchanges 175 

China  the  last  remaining  silver-using  country  of  impor- 
tance. —  Silver  coinage  regarded  as  bullion.  —  Price  of  silver 


jrii  CONTENTS 

FAGI 

and  th^rate  of  exchange^- —  How  the  fluctuations  in  silver 
prices  affect  foreign  trade.  —  Quoting  merchandise  prices  in 
silver-using  countries. 

APPENDIX 181 

How  to  convert  pounds,  francs,  and  marks  into  U.  S.  cur- 
rency and  vice  versa  (from  Brooks'  Foreign  Exchange  Text- 
book).—  Monetary  systems  of  the  principal  countries  of  the 
world. 


FOREIGN    EXCHANGE 
EXPLAINED 


CHAPTER  I 

INTRODUCTORY 

Foreign  exchange  may  perhaps  best  be  denned  as 
the  business  of  buying  and  selling  orders  for  the  pay- 
ment of  foreign  money  at  a  foreign  point.  Between 
any  two  countries  the  rate  of  exchange  is  the  price  of 
the  money  of  the  one  expressed  in  the  money  of  the 
other. 

To  an  American  the  term  "  money  "  means  dollars 
and  cents ;  to  an  Englishman  pounds,  shillings,  and 
pence ;  to  a  Frenchman  francs  and  centimes.  Each 
thinks  in  the  currency  of  his  own  country,  and,  naturally 
enough,  demands  that  anything  owing  to  him  be  paid 
for  in  that  currency.  The  American  who  buys  some- 
thing in  England  knows  he  has  got  to  pay  for  it  in 
pounds  sterling ;  but  if,  on  the  other  hand,  he  sells  some- 
thing in  England,  he  expects  to  get  his  pay  for  it  in 
dollars.  Different  nations  with  different  kinds  of 
money  all  the  while  trading  with  one  another  and  each 
demanding  that  payments  to  it  be  made  in  its  own 
money  —  that,  in  a  word,  is  responsible  for  what  is 
known  as  "  foreign  exchange." 


2  FOREIGN  EXCHANGE  EXPLAINED 

How  International  Payments  Are  Made.  —  There 
are  two  ways  in  which  international  payments  can  be 
made :  (i)  by  having  the  creditor  draw  a  draft  on  the 
debtor,  (2)  by  having  the  debtor  send  to  the  creditor 
a  bank  draft  drawn  to  the  creditor's  order.  A  mer- 
chant in  New  York,  we  will  say,  has  sold  to  a  merchant 
in  London  a  bill  of  goods  amounting  to  $1000.  The 
New  York  merchant  can  get  his  money  :  (1)  by  drawing 
a  draft  on  the  London  merchant  for  enough  pounds 
sterling  so  that  when  he  (the  New  York  merchant) 
sells  the  draft  at  the  current  rate  of  exchange,  he  will 
realize  $1000  from  its  sale)for  (2)  the  London  merchant 
may  secure  from  his  bank  a  draft  on  its  New  York  corre- 
spondent for  $1000,  and  send  that  to  the  New  York 
merchant  in  payment. 

At  any  given  centre  having  important  financial  rela- 
tionships with  the  outside  world,  it  will  thus  be  seen, 
drafts  drawn  in  foreign  money  on  foreign  points  are 
all  the  time  coming  into  existence.  At  any  such  centre, 
on  the  other  hand,  there  is  continually  a  demand  for 
drafts  drawn  in  foreign  currency  on  foreign  points. 

Function  of  the  Foreign  Exchange  Banker.  —  Now 
if  it  were  possible,  at  a  place  like  New  York,  for  the 
people  who  have  drafts  to  sell  to  get  into  direct  touch 
with  the  people  who  want  to  buy  drafts,  there  would 
be  no  need  for  the  foreign  exchange  banker.  A  moment's 
thought  will  show  why  that  is  impossible.  In  the  first 
place  there  is  no  way  in  which  the  man,  for  instance, 
who  has  bought  silk  in  France  and  needs  a  draft  in 
francs  to  pay  for  it  can  get  into  contact  with  the  man 
who  has  sold  cotton  in  France  and  in  consequence  has 

/ 


INTRODUCTORY  3 

a  draft  in  francs  on  the  buyer  which  he  wants  to  dispose 
of.  In  the  next  place,  even  though  they  did  get  together, 
there  is  very  little  likelihood  that  the  draft  drawn  against 
the  cotton  would  be  even  of  approximately  the  amount 
required  by  the  man  who  has  to  pay  for  the  silk. 
Further,  the  cotton  draft  would  very  likely  be  drawn  at 
sixty  days'  sight,  on  a  mercantile  house  and  with  bill  of 
lading  and  other  documents  attached.  For  the  purposes 
of  the  silk  importer,  requiring  a  banker's  sight  draft 
for  a  specified  amount,  such  a  draft  would  be  quite 
valueless. 

Just  here  is  where  the  foreign  exchange  banker  com'"1, 
in.  Smith,  he  knows,  has  a  draft  to  sell.  Jones  has  a 
draft  to  buy.  Very  well,  says  the  banker,  I  will  take 
off  Smith's  hands  the  draft  he  has  to  sell,  and  place  it 
in  my  deposit  account  in  Paris,  thus  putting  myself 
in  a  position  to  sell  Jones  the  draft  he  needs  —  my  own 
draft  on  my  own  depositary  bank  abroad.  It  doesn't 
make  any  difference  to  me  whether  the  draft  I  buy 
from  Smith  is  drawn  at  sixty  days'  sight,  or  is  on  a  mer- 
cantile house,  or  has  documents  attached.  All  is  grist 
that  comes  to  my  mill.  All  I  have  to  do  is  to  send 
Smith's  draft  to  my  correspondent  in  Paris,  who,  through 
the  medium  of  the  discount  market  there,  will  turn  it 
into  cash  and  credit  my  account  with  it  within  a  few 
hours  after  its  arrival.  If  to  put  the  net  proceeds  in 
francs  over  there  costs  me  less  dollars  and  cents  here 
than  I  can  get  from  Jones  for  the  draft  for  a  like  amount 
I  am  going  to  sell  him,  the  difference  will  be  clear  profit. 

So  that  is  the  function  of  the  foreign  exchange  banker 
—  to  stand  as  an  intermediary  between  the  man  who  has 


4  FOREIGN  EXCHANGE   EXPLAINED 

a  draft  to  sell  and  the  man  who  has  a  draft  to  buy, 
taking  from  the  former  (at  an  appropriate  price)  any- 
thing he  may  have  to  offer  and  selling  to  the  latter  the 
particular  kind  of  draft  for  exactly  the  amount  he  may 
want. 

Rate  of  Exchange.  —  The  price  in  dollars  and  cents  at 
which  the  foreign  exchange  banker  will  sell  you  drafts 
on  the  balance  he  is  carrying  somewhere  abroad  —  the 
rate  of  exchange  on  that  point,  in  other  words  —  depends 
entirely  upon  the  amount  of  dollars  and  cents  it  cost 
him  to  establish  the  balance.  If  a  great  number  of 
*r»fts  drawn  in  sterling  against  exports  of  wheat  or 
cotton  or  securities  are  offered  to  the  banker  and  he  is 
able  to  buy  them  at  constantly  declining  quotations,  in 
like  proportion  will  the  price  in  dollars  and  cents  (the 
rate  of  exchange)  decline  which  he  (the  banker),  will 
charge  for  his  own  drafts.  All  he  is  looking  for  and  all 
the  other  foreign  exchange  bankers  doing  business  at 
that  point  are  looking  for,  is  a  chance  to  make  a  moderate 
profit.  As  the  banker  can  buy  cheaper  he  will  sell  his 
own  drafts  cheaper,  and  conversely,  as  he  has  to  pay 
more,  he  will  charge  more. 

The  rate  of  exchange,  it  is  thus  evident,  depends 
entirely  upon  the  demand  and  supply  of  bills.  If  London 
owes  New  York  heavily  for  purchases  of  commodities  or 
securities  or  anything  else,  it  is  plain  that  merchants 
and  bankers  in  New  York  are  going  to  draw  a  large 
amount  of  drafts  in  pounds  sterling  and  that  when  these 
drafts  are  offered  for  sale  in  the  open  foreign  exchange 
market  in  New  York,  the  natural  tendency  of  the  price 
for  pounds  sterling  is  going  to  be  downward.     Similarly, 


INTRODUCTORY  5 

if  New  York  owes  London  largely,  and  every  one  in  New 
York  is  trying  to  buy  sterling  drafts  drawn  on  London 
with  which  to  make  payments,  it  is  plain  that  the  rate 
for  pounds  is  going  to  rise. 

Every  Rate  of  Exchange  Is  a  Two-ended  Affair.  —  It 
must  be  remembered,  however,  that  the  rate  of  exchange 
between  any  two  given  points  is  a  two-ended  affair  and 
determined  by  conditions  at  both  ends.  At  New  York, 
for  instance,  on  some  given  day,  the  demand  for  and  the 
supply  of  drafts  on  London  might  be  so  nearly  equal  as  to 
hold  the  rate  of  exchange  practically  stationary ;  but 
in  London  on  that  particular  day  there  might  easily 
develop  a  demand  for  drafts  drawn  in  dollars  on  New 
York  which  would  cause  the  London  rate  on  New  York 
to  go  up.  Such  a  movement  would  naturally  have  a 
quick  reflection  on  the  rate,  in  New  York,  for  pounds 
sterling.  If  the  rate  in  London  goes  up,  the  rate  in 
New  York  must  of  course  go  down  correspondingly,  and 
vice  versa. 

If  any  explanation  of  the  above  is  needed,  it  is  to  be 
found  in  the  fact  that  it  is  obviously  impossible  that  the 
pound  sterling  and  the  dollar  should  exchange  at  a 
material  difference  in  price  in  New  York  and  London  at 
the  same  time.  For  purposes  of  illustration  (with  the 
cable  working,  such  a  thing  would  of  course  be  impossible) , 
suppose  the  price,  in  London,  for  drafts  drawn  in  dollars 
on  New  York  was  $4.86  to  the  pound  while  in  New  York 
the  price  for  drafts  drawn  in  pounds  sterling  on  London 
was  $4.85.  Is  it  not  evident  that  in  New  York  every  one 
in  the  business  would  at  once  rush  to  avail  himself  of  the 
chance  to  purchase  for  $4.85  something  which  could 


6  FOREIGN  EXCHANGE  EXPLAINED 

immediately  be  exchanged,  by  merely  sending  it  to 
London,  for  $4.86?  And  if  that  is  the  case,  is  it  not 
evident  that,  as  a  result  of  this  buying,  the  price  of  pounds 
in  New  York  would  tend  to  go  up  from  $4.85  toward 
the  price  of  $4.86  for  which  pounds  were  exchanging 
in  London? 

$4.88  in  New  York  —  $4.88  in  London.  —  Between  any 
two  cities  having  important  foreign  exchange  relations, 
the  rate  of  exchange  must  invariably  be  the  same  or 
very  nearly  the  same  at  both  ends.  If  the  rate  in  New 
York  on  London  is  $4.88,  the  rate  in  London  on  New 
York  will  be  $4.88  or  very  close  to  it.  If  something 
happens  in  New  York  to  drive  the  rate  on  London  down 
to  $4.84,  the  rate  in  London  on  New  York  will  rise  to 

$4-84- 

Observe  that  the  change  in  the  quotation  from  $4.88 
to  $4.84,  at  New  York,  for  drafts  drawn  on  London, 
represents  a  decline  in  the  rate  —  that  is  to  say  that 
pounds  are  cheaper.  Observe  that  the  same  movement 
from  $4.88  to  $4.84  in  the  quotation,  in  London,  for 
drafts  on  New  York  represents  an  advance  in  the  rate  — 
that  is  to  say  that  less  dollars  can  be  bought  for  each 
pound  sterling. 

The  rate  of  exchange  between  any  two  given  points, 
it  will  thus  be  seen,  works  exactly  on  the  principle  of  a 
see-saw.  If  you  push  one  end  of  a  see-saw  down,  by 
that  very  act  you  lift  the  other  end  correspondingly  up. 
You  can't  move  one  end  without  affecting  the  other. 


CHAPTER  II 

PARS   OF   EXCHANGE 

Before  going  on  to  discuss  what  makes  rates  of  ex- 
change go  up  and  down  from  par,  it  is  well  to  be  sure 
that  we  have  clearly  in  mind  just  exactly  what  "  par  "  is. 

All  nations  whose  currency  is  on  a  gold  basis  —  and 
with  a  few  commercially  unimportant  exceptions  the 
whole  world's  currency  is  to-day  on  a  gold  basis  —  decree 
by  law  just  what  weight  of  gold  shall  be  contained  in 
their  standard  gold  coin  and  what  the  fineness  of  the 
gold  shall  be.  Thus,  in  the  United  States  the  ten-dollar 
gold  piece  (eagle)  is  coined  of  16.7182  grammes  of  gold 
.900  fine  (90%  pure) ;  in  Great  Britain  the  gold  pound 
sterling  (sovereign)  is  coined  of  7.98805  grammes  of  gold 
.916!  fine  (91.66%  pure),  etc.,  etc.  Each  coin  on  leaving 
the  mint,  whether  it  be  the  American  eagle  or  the  British 
sovereign  or  the  French  napoleon  or  whatever  it  is, 
weighs  just  so-and-so  much  and  is  of  just  such-and-such 
a  fineness. 

Now  it  is  a  simple  arithmetical  process,  knowing  the 
weight  and  fineness  of  a  coin,  to  find  the  total  amount  of 
pure  gold  contained  therein.  Take  the  case  of  the 
American  eagle,  which  weighs  16.7182  grammes  and  is 
.900  fine.  Of  absolutely  pure  gold  in  the  eagle,  obviously, 
there  is  90%  of  16.7182  grammes  =  15.0464  grammes. 

7 


8  FOREIGN  EXCHANGE   EXPLAINED 

In  the  case  of  the  sovereign,  which  weighs  7.98805 
grammes  and  is  .916!  fine,  the  calculation  would  be 
9i|%  of  7.98805  grammes,  which  is  7.32238  grammes. 

Par  and  How  It  Is  Found.  —  Having  determined  the 
exact  weight  of  absolutely  pure  gold  contained  in  any 
two  coins  as  above,  it  is  easy  to  find  the  relation  —  or 
"  par  "  —  between  them  by  simply  dividing  the  one 
by  the  other.  Thus  if  we  divide  the  amount  of  pure 
gold  in  the  sovereign,  7.32238  grammes,  by  the  amount  of 
pure  gold  in  the  dollar  (one-tenth  as  much  as  there  is  in 
the  eagle),  1.50464  grammes,  we  find  that  the  "  par  of 
exchange "  between  the  sovereign  and  the  dollar  is 
4.8665.  To  put  it  another  Way,  there  is  4.8665  times  as 
much  absolutely  pure  gold  in  the  sovereign  as  there  is 
in  the  dollar. 

To  find  the  par  of  exchange  between  any  two  gold 
standard  countries  is  just  as  simple,  provided  you  know 
the  exact  weight  and  fineness  of  their  respective  coins. 
Having  that,  it  is  an  easy  matter  to  find  the  weight  of  the 
pure  gold  contained  in  each ;  after  which  it  is  only 
necessary,  in  order  to  find  the  par,  to  divide  the  one  by  the 
other. 

The  par  of  exchange  between  two  countries,  then, 
may  be  defined  as  the  price  of  the  gold  money  of  the  one 
expressed  in  terms  of  the  money  of  the  other.  Forget 
for  the  moment  that  the  sovereign  is  a  coined  piece  and 
think  of  it  merely  as  a  disk  made  of  7.3223  grammes  of 
absolutely  pure  gold.  If  the  price  of  1.5046  grammes  of 
pure  gold  in  the  United  States  is  one  dollar,  what  will  be 
the  price  of  7.3223  grammes?  $4.8665  is  the  answer, 
which  is  what  you  would  get  at  any  Unites  States  Assay 


PARS   OF  EXCHANGE  9 

Office  for  the  amount  of  gold  contained  in  a  newly  minted 
British  sovereign. 

"  Par  "  and  the  Rate  of  Exchange.  —  Pars  of  exchange, 
from  the  standpoint  of  the  exporter  or  the  importer, 
whose  foreign  remittances  are  made  exclusively  by  drafts, 
are  of  little  interest ;  but  to  the  banker  who  concerns 
himself  with  specie  shipments  pars  are  of  very  great 
importance  indeed.  The  par  of  exchange  between 
England  and  the  United  States,  for  example,  being  the 
amount  in  dollars  which  new  sovereigns  will  fetch  in 
this  country,  it  stands  to  reason  that  no  New  York 
banker  is  going  to  sell  drafts  (orders  for  the  payment 
of  pounds  in  London)  at  a  rate  of  exchange  which  will 
yield  him  less  dollars  and  cents  than  he  could  realize 
by  bringing  the  sovereigns  themselves  over  here.  Con- 
versely, no  American  banker  desiring  to  increase  his  l 
deposit  in  pounds  in  London  is  going  to  pay  more  dollars 
and  cents  for  those  pounds  than  it  would  cost  him  physi- 
cally to  ship  the  amount  of  gold  contained  in  those 
pounds. 

Assuming,  then,  a  free  gold  market  on  each  end,  the 
rate  of  exchange  can  rise  only  just  so-and-so  far  above  par 
and  can  fall  only  just  so-and-so  far  below  par,  the  extent 
of  the  possible  rise  being  the  amount  it  costs  to  ship  gold 
to  London  and  the  extent  of  the  possible  fall  being  the 
amount  it  costs  to  bring  gold  in  from  London.  A  full 
discussion  of  these  costs  and  of  how  they  are  figured  is 
found  in  Chapter  XII. 


CHAPTER  III 

INTERNATIONAL   BANKING 

Knowing  now  what  constitutes  the  par  of  exchange 
between  any  two  countries,  it  might  seem  as  though  the 
decks  were  cleared  for  discussion  of  what  makes  exchange 
rise  above  par  and  fall  below  it.  Before  going  ahead, 
however,  we  want  to  be  sure  that  the  fundamental 
differences  existing  between  some  of  the  principal  markets 
whose  exchanges  we  shall  be  looking  into  are  fully  appre- 
ciated. On  that  rock  many  a  serious  effort  to  study  the 
theory  and  practice  of  the  foreign  exchanges  has  gone  to 
pieces. 

In  the  first  place  it  must  be  very  clearly  understood 
that  among  the  financial  markets  of  the  world  London 
occupies  an  entirely  unique  position.  Recent  years  have 
seen  New  York  come  forward  by  leaps  and  bounds  as  a 
world  market,  but  London's  position,  we  must  bear  in 
mind,  is  a  development  of  centuries  —  and  financial 
confidence  is  a  plant  of  slow  growth. 

Whatever  strides  forward  have  been  made  by  other 
markets  during  recent  years  and  however  the  balance 
of  banking  power  may  shift  in  the  years  to  come,  the 
fact  remains  that  London  is  to-day  as  she  has  been  for 
centuries,  the  world's  banker.  Nor  is  there  any  mystery 
about  the  fact  that  in  parts  of  the  world  where  the  mark, 


INTERNATIONAL  BANKING  u 

the  franc,  and  even  the  justly  esteemed  American  dollar 
have  never  been  heard  of,  the  pound  sterling  and  the 
draft  on  London  pass  current.  The  fact  of  the  matter  is 
that  where  one  bank  in  some  outlying  part  of  the  world 
carries  a  balance  in  New  York  or  Paris,  ten  carry  a 
balance  in  London.  Internationally  speaking,  every  one 
carries  a  balance  in  London. 

Breadth  of  the  London  Discount  Market.  —  With  the 
banks  all  over  the  world  leaving  large  sums  of  money 
on  deposit  in  London  at  all  times,  and  with  the  use  of 
all  this  money  in  British  hands,  is  there  any  further 
explanation  needed  of  the  fact  that  the  discount  market 
in  London  completely  overshadows  in  importance  the 
discount  market  of  every  other  point  ? 

In  its  bearing  on  London's  foreign  exchange  relation- 
ships with  other  financial  centres,  this  fact  that  the 
banks  all  over  the  world  keep  balances  in  London  is  of  the 
utmost  importance.  At  all  times  these  outside  banks 
stand  ready  to  sell  drafts  drawn  in  sterling  on  their 
London  balances.  At  all  times  they  stand  ready  to  buy 
drafts  drawn  in  sterling  on  London,  for  the  purpose  of 
replenishing  these  balances.  Practically  anywhere  in 
the  world  and  at  any  time,  in  other  words,  you  can  buy 
a  draft  on  London  if  you  need  one,  or,  if  you  have  a 
draft  on  London  to  sell,  you  can  find  a  bank  which  will 
take  it  off  your  hands. 

That  being  the  case,  it  has  come  about  that  London 
conducts  the  vast  bulk  of  its  foreign  business  —  both 
export  and  import  —  in  its  own  currency,  the  pound 
sterling.  Have  you  sold  something  to  a  merchant  in 
England  ?  —  very  well,  says  he,  draw  on  me  in  pounds 


12  FOREIGN  EXCHANGE  EXPLAINED 

for  what  I  owe  you.  Has  he  sold  something  to  you?  — 
very  well,  says  he,  send  me  a  banker's  draft  drawn  to  my 
order  in  sterling  on  London.  In  either  case,  observe, 
whether  he  owes  you  or  whether  you  owe  him,  the  obliga- 
tion is  settled  in  sterling.  There  is  little  or  no  question 
of  his  sending  you  a  draft  drawn  on  New  York  in  dollars 
or,  if  you  owe  him,  of  his  drawing  on  you  in  dollars. 

To  a  certain  extent  the  London  banks  do,  of  course, 
carry  balances  at  New  York  and  Paris  and  other  primary 
points  and  so  are  in  a  position  to  buy  and  sell  drafts  in 
dollars  or  francs  or  other  currencies  when  they  so  desire. 
By  no  means,  however,  can  the  market  in  London,  for 
instance,  for  dollar  drafts  on  New  York,  compare  in 
breadth  or  scope  with  the  market  for  sterling  drafts  here. 

A  market  for  exchange,  to  be  worthy  of  the  name, 
it  must  be  borne  in  mind,  must  be  a  market  on  which  not 
only  bills  payable  at  sight  but  bills  payable  at  sixty  and 
ninety  days'  sight  can  be  freely  bought  and  sold.  And, 
of  course,  unless  there  exists  a  fair  discount  market  at 
any  given  point,  the  drawing  of  sixty  and  ninety-day 
drafts  to  any  extent  on  that  point  is  out  of  the  question. 
No  one  is  ever  willing  to  buy  drafts  of  that  character 
except  with  the  assurance  that  they  can  be  readily  dis- 
counted and  turned  into  cash. 

The  New  Discount  Market  at  New  York.  —  So  far  as 
the  United  States  is  concerned,  it  is  to  be  noted  that  it  is 
only  since  1913,  when  the  Federal  Reserve  system  was 
put  into  effect,  that  there  has  been  even  a  semblance  of 
a  discount  market  in  this  country.  Before  the  passage 
of  the  Federal  Reserve  Act,  indeed,  time  drafts  from 
abroad  could  not  legally  be  drawn  on  the  national  banks. 


INTERNATIONAL  BANKING  13 

Under  special  arrangements,  the  foreign  correspondents 
of  a  few  of  the  larger  New  York  private  banking  houses 
drew  drafts  in  dollars  at  sixty  and  even  ninety  days'  sight ; 
but  this  was  possible  only  where  there  existed  no  need 
that  these  drafts  be  turned  into  cash  through  the  medium 
of  an  open  discount  market.  Only  very  recently  can 
there  be  said  to  have  been  any  really  considerable  drawing 
of  time  dollar  drafts  on  New  York.  Time  drafts  drawn 
in  any  volume  require  a  market  in  which  they  can  be 
readily  discounted ;  and  a  discount  market,  pre- 
supposing the  carrying  of  large  deposits  at  New  York  by 
banks  all  over  the  world,  is  something  which  it  takes 
many,  many  years  to  build  up. 

So  far  as  a  discount  market  is  concerned,  Paris, 
Amsterdam,  and  several  other  European  financial  centres 
are  far  better  off  than  New  York,  and  the  amount  of 
"  time  "  drafts  drawn  on  these  points  probably  far  ex- 
ceeds the  amount  of  time  drafts  drawn  on  New  York. 
In  France,  for  instance,  there  is  a  large  amount  of 
accumulated  capital,  which  gives  to  the  Paris  discount 
market  a  considerable  degree  of  breadth  and  stability. 
Even  so,  however,  the  amount  of  drafts  drawn  on  Paris  is 
in  no  way  comparable  to  the  amount  drawn  on  London. 

To  illustrate  the  above,  suppose  that  on  some  given 
day  a  banking  house,  say  in  New  York,  found  it  necessary 
suddenly  to  dispose  of  a  large  amount  of  sterling  drawn 
on  London  and  equally  large  amounts  of  francs  drawn  on 
Paris  and  guilders  drawn  on  Rotterdam.  Under  normal 
circumstances  the  chances  are  that  whereas  the  sterling 
could  probably  all  be  sold  without  causing  any  recession 
of  any  account  in  the  rate  of  exchange  on  London,  the 


i4  FOREIGN  EXCHANGE  EXPLAINED 

rate  of  exchange  on  Paris  would  be  appreciably  lowered 
and  the  rate  of  exchange  on  Rotterdam  be  broken 
"  wide  open."  It  is  going  too  far  to  say  that,  in  foreign 
exchange,  sterling  is  the  "  universal  currency  " ;  but 
it  is  undoubtedly  true  that  in  New  York,  at  least,  the 
amount  of  sterling  dealt  in  largely  exceeds  the  total 
of  all  the  other  currencies  put  together. 


CHAPTER  IV 

SOURCES   OF   SUPPLY  AND  DEMAND 

As  stated  in  Chapter  I,  at  any  given  city  having  im- 
portant foreign  financial  relationships,  drafts  drawn  in 
foreign  currencies  on  foreign  points  are  all  the  time 
coming  into  existence ;  while,  on  the  other  hand,  there 
is  always  a  demand  for  drafts  drawn  in  foreign  currencies 
on  foreign  points.  Let  us  take  the  New  York  market 
and  look  at  the  various  sources  of  supply  and  demand. 

Supply,  I.  Exports  of  Merchandise.  —  Exports  of 
merchandise  from  all  over  the  United  States  originate  a 
very  large  volume  of  bills  of  exchange  drawn  by  the 
seller  here  upon  the  buyer  abroad  or  upon  some  bank 
abroad  designated  by  the  buyer.  In  the  vast  majority  of 
cases  this  is  the  method  by  which  payment  is  effected. 
John  Smith  in  Atlanta,  Ga.,  has  sold  to  John  Jones  in 
London  so-and-so-many  bales  of  cotton  at  so-and-so- 
many  pence  per  pound  of  cotton  and  thus  has  a  claim 
against  Jones  in  London  for,  say,  £1200.  For  this 
amount,  therefore,  Smith  proceeds  to  draw  a  draft  on 
Jones  (or  if  it  has  been  arranged  that  way,  on  Jones'  bank 
in  London),  attaching  thereto  the  bill  of  lading  and  the 
other  papers. 

Smith  now  finds  himself  in  possession  of  a  draft 
representing  a  valid  claim  on  Jones  or  on  Jones'  bank  for 

is 


16  FOREIGN  EXCHANGE  EXPLAINED 

£1200,  payable  in  London.  What  Smith  wants,  how- 
ever, is  dollars  in  Atlanta  not  pounds  in  London.  To 
some  one  who  does  want  pounds  in  London,  therefore, 
and  who  will  pay  him  dollars  for  them,  Smith  must  offer 
his  draft.  Practically,  what  Smith  does  is  to  get  into 
touch  with  the  foreign  exchange  market  and  sell  his  bill 
to  the  banker  who  will  give  him  the  most  dollars  and 
cents  for  it.  (Observe  that  nobody  discounts  the  drafts. 
Smith  sells  it  outright  at  a  price  of  so-and-so-many 
dollars  and  cents  for  each  pound  sterling  contained 
therein.) 

In  Chapter  VII  there  will  be  found  a  full  description 
of  drafts  drawn  against  exports,  the  length  of  time  they 
run  (usance),  the  conditions  governing  the  price  at 
which  they  are  bought  and  sold,  etc.  At  this  point 
in  our  study  of  exchange  it  is  only  necessary  to  point 
out  how  exports  of  merchandise  create  a  constant 
supply  of  bills  of  exchange  —  bills  drawn  in  all  the 
various  currencies  of  the  various  countries  to  which 
the  merchandise  is  sent. 

Supply,  II.  Security  Exports.  —  Next  in  importance 
to  merchandise  exports  as  creators  of  exchange  come 
security  exports,  that  is  to  say  sales  by  Americans  of 
stocks  and  bonds  in  foreign  countries.  Just  as  a  grain 
exporter  in  Chicago  reimburses  himself  for  grain  shipped 
to  Great  Britain  by  drawing  drafts  in  sterling  on  London, 
so  the  American  banker  or  broker  who  has  sold  a  hundred 
shares  of  United  States  Steel  or  ten  bonds  of  the  Penn- 
sylvania Railroad  in  London  draws  his  draft  for  the 
proceeds  in  sterling  on  the  buyer.  Possibly  to  the  draft 
the  seller  will  attach  the  stock  certificates  or  the  bonds 


SOURCES  OF   SUPPLY  AND  DEMAND        17 

themselves,  with  instructions  that  they  are  to  be  delivered 
to  the  drawee  only  upon  his  paying  the  draft.  That, 
however,  is  by  no  means  an  invariable  rule.  Very  often, 
where  the  credit  and  standing  of  the  buyer  abroad  war- 
rant such  a  course,  the  securities  are  sent  by  themselves 
and  a  "  clean  "  draft  (a  draft  without  any  papers  at- 
tached to  it)  is  drawn  later.  Sometimes,  indeed,  weeks 
are  allowed  to  elapse  between  the  time  the  stocks  or 
bonds  are  sent  and  the  time  the  reimbursing  draft  is 
drawn. 

But  whether  the  drawing  against  securities  sold  abroad 
is  immediate  or  whether  it  is  delayed,  sooner  or  later  the 
draft  will  be  brought  into  existence  —  unless,  of  course, 
the  buyer  abroad  sells  an  equivalent  amount  of  securities 
to  the  seller  here,  in  which  case  neither  party  draws  on 
the  other  except  for  a  small  balance.  Let  a  buying 
movement  in  "  Yankees  "  set  in  in  London  or  on  the 
Continent,  and  quickly  enough  it  will  find  reflection  in 
increased  amounts  of  exchange  drawn  on  London  offered 
for  sale  in  the  New  York  foreign  exchange  market. 
Let  a  big  bond  issue  by  one  of  the  American  railroads 
in  which  Europe  is  heavily  interested  be  brought  out  in 
New  York,  and  almost  immediately  the  exchange  market 
will  feel  the  effect  of  the  offering  of  sterling  and  franc 
drafts  drawn  on  the  participants  abroad. 

Supply,  III.  Foreign  Loans.  —  The  third  great 
originator  of  foreign  exchange  in  New  York  is  the  money 
market.  Let  the  rate  for  sixty  and  ninety-day  money  in 
New  York  rule  above  the  corresponding  rate  in  foreign 
financial  centres  (most  of  the  time  it  does),  and  imme- 
diately large  sums  of  English  and  French  banking  capital 


iS  FOREIGN   EXCHANGE   EXPLAINED 

will  find  employment  in  this  market.  (These  foreign 
loans  to  us,  it  is  to  be  noted,  are  not  to  be  confused  with 
government  bonds  sold  abroad  by  us  or  vice  versa,  and 
represent  merely  the  use  of  free  banking  capital,  for 
short  periods,  in  that  market  where  the  best  return  is 
offered  for  its  use.) 

The  mechanism  of  foreign  loans  to  this  market  is  a 
subject  rather  technical  and,  perhaps,  confusing  to  the 
beginner,  and  so  description  thereof  has  been  put  off 
to  a  later  chapter  (13).  How  loans  of  this  sort  create  a 
supply  of  exchange  will,  however,  be  clearly  understood 
from  the  statement  that  when  London  bankers  make 
sixty  and  ninety-day  loans  to  New  York,  transfer  of  the 
funds  is  effected  by  having  a  banking  house  in  New  York 
draw  sixty  and  ninety-day  drafts  on  the  bank  in  London 
which  is  doing  the  lending  At  a  time  when  London  is 
lending  heavily  in  New  York,  the  New  York  market  is 
likely  to  be  literally  flooded  with  offerings  of  sixty  and 
ninety-day  bills  drawn  in  sterling  on  London. 

It  may  be  objected  that  this  is  not  what  might  be 
called  a  "  legitimate  "  source  of  supply  of  bills  —  that 
sooner  or  later  these  loans  have  to  be  paid  off  and  that 
when  that  happens  there  is  originated  a  demand  for  bills 
drawn  on  London,  with  which  to  make  the  payments, 
fully  as  large  or  larger  than  the  supply  created  when  the 
loan  was  originally  made.  All  of  which  is  quite  true 
but  in  no  way  subversive  of  the  fact  that  at  the  time  the 
loans  are  made  a  large  amount  of  new  exchange  is  brought 
into  existence.  Nothing,  in  fact,  "  makes  "  exchange  as 
fast  as  a  disposition  on  the  part  of  London  and  Paris 
bankers  to  lend  money  in  New  York,  accompanied  by 


SOURCES   OF   SUPPLY  AND   DEMAND        19 

instructions  to  their  New  York  correspondents  to  draw 
upon  them. 

Supply,  IV.  International  Services  Rendered  by  Us. 
—  From  the  three  sources  enumerated  above  there 
originates  the  great  bulk  of  the  foreign  exchange  offered 
for  sale  in  the  New  York  market.  It  should,  however, 
be  noted  that  there  is  a  certain  amount  of  exchange  all 
the  time  being  created  in  the  discharge  of  miscellaneous 
debts  owed  to  this  market  from  abroad.  If,  for  instance, 
M.  Jacques  Bonhomme  of  Bordeaux  decides  to  visit  the 
United  States  and  spend  some  little  time  there,  the 
chances  are  that  the  American  correspondent  of  M. 
Bonhomme's  bank  will  be  asked  to  pay  out  a  considerable 
number  of  dollars  for  M.  Bonhomme's  account.  Sooner 
or  later  that  American  bank  (or  some  other  bank  to 
which  it  has  transferred  its  claim)  will  draw  a  draft  in 
francs  on  Bordeaux  or  Paris  and  offer  it  for  sale  in  the 
foreign  exchange  market. 

Similarly,  a  lawyer  in  New  York  who  has  done  work 
for  a  capitalist  abroad,  a  publishing  house  which  has 
sold  the  foreign  rights  to  a  book  —  any  one,  in  fact,  who 
has  "  exported  "  services,  may  draw  drafts  upon  the 
debtor  abroad.  The  amount  of  such  services  rendered 
by  us,  it  is  true,  is  in  no  way  comparable  to  the  amount  of 
services  rendered  from  abroad  to  us,  but  nevertheless  is 
annually  productive  of  a  very  considerable  amount  of 
bills  of  exchange. 

Demand,  I.  Merchandise  Imports.  —  Looking  at 
the  other  side  of  the  picture,  it  is  plain  that  just  as  exports 
of  merchandise  produce  the  bulk  of  the  supply  of  ex- 
change, so  imports  of  merchandise  produce  the  bulk  of 


so  FOREIGN  EXCHANGE  EXPLAINED 

the  demand  for  bills  of  exchange.  When  we  buy  goods  in 
England  or  in  France  or  in  South  America,  as  has  been 
pointed  out,  the  sellers  abroad  very  seldom  draw  on  us  in 
dollars.  Either  the  buyer  here  has  got  to  go  to  his  banker 
and  get  a  banker's  draft  in  sterling  or  francs,  or  whatever 
the  currency  is,  and  send  that,  or  else  he  (the  buyer  here) 
has  got  to  arrange  to  have  the  seller  in  South  America  or 
out  in  the  East  or  wherever  he  may  be,  draw  a  draft  on 
London  for  the  value  of  the  shipment.  Which  latter,  of 
course,  amounts  to  the  same  thing.  If  some  London 
bank  is  directed  by  a  Commercial  Letter  of  Credit 
(fully  described  in  Chapter  XIV)  to  pay  the  draft  of  a 
coffee  shipper  in  Rio  de  Janeiro  for  account  of  some  firm 
in  New  York  which  is  importing  the  coffee,  it  stands  to 
reason  that  sooner  or  later  the  New  York  coffee  importer 
will  be  in  the  market  for  a  draft  on  London  with  which 
to  reimburse  the  London  bank. 

Whatever  merchandise  we  bring  into  the  country  we 
have  got  to  pay  for  —  either  by  being  drawn  on  our- 
selves or  by  arranging  to  have  some  bank  abroad  drawn 
on,  or  by  sending  abroad  a  banker's  draft  in  the  seller's 
currency  drawn  to  the  seller's  order.  However  true  it 
may  be  from  the  economist's  standpoint  that  "  goods  are 
paid  for  with  goods,"  in  actual  practice  we  get  paid  in 
money  for  what  we  sell  and  we  have  to  pay  in  money  for 
what  we  buy. 

Demand,  II.  Security  Imports.  —  Exactly  the  same 
thing  is  true  with  regard  to  securities  bought  abroad  by 
us.  There  have  been  cases,  it  is  true,  where  foreign 
governments  purchasing  goods  in  the  United  States 
have  made  direct  payment  in  their  own  bonds,  but  such 


SOURCES  OF   SUPPLY  AND   DEMAND         21 

is  not  the  usual  procedure.  As  a  rule  when  we  buy 
stocks  or  bonds  abroad,  the  money  to  pay  for  them  has 
to  be  sent  to  the  other  side  in  the  form  of  a  banker's 
draft  drawn  in  the  seller's  currency.  It  may  be,  of 
course,  that  the  party  abroad  who  has  sold  the  securities 
prefers  temporarily  to  employ  the  proceeds  here  and  so 
directs  that  they  be  deposited  to  his  credit  in  some 
American  bank,  but  even  so  the  recall  of  the  funds  is 
only  postponed.  Unless,  of  course,  the  seller  abroad  at 
some  time  in  the  meantime  becomes  a  buyer,  and,  so 
having  a  payment  to  make  in  America,  directs  that  it  be 
made  out  of  his  previously  established  American  dollar 
bank  balance. 

Demand,  III.  Repayment  of  Loans.  —  The  third 
great  source  of  demand  for  bills  of  exchange  comes  from 
the  repayment  of  short  loans  to  the  American  market, 
alluded  to  earlier  in  the  chapter.  A  bank  in  Paris 
may  lend  to  some  one  in  New  York  fc.  250,000  through 
the  instrumentality  of  "  long  "  drafts  drawn  by  the 
Paris  bank's  New  York  correspondent  (Chapter  13)  but 
sixty  days  or  ninety  days  later  when  the  loan  comes  due, 
exchange  on  Paris  with  which  to  pay  it  off  has  got  to 
be  provided  by  the  borrower.  Even  if  the  loan  is 
renewed  and  more  "  long  "  bills  are  drawn  to  carry  the 
loan  along  for  another  period,  the  chances  are  that  they 
will  be  actually  sold  in  the  New  York  market  and  the 
proceeds  used  to  purchase  a  demand  draft  to  be  sent 
over  to  Paris  in  payment. 

Short  loans  of  foreign  banking  capital  to  the  New  York 
market,  it  will  thus  be  seen,  have  an  important  influence 
on  both  the  demand  for  and  the  supply  of  exchange. 


22  FOREIGN   EXCHANGE  EXPLAINED 

When  the  loan  is  made,  bills  of  exchange  (usually  at 
sixty  or  ninety  days'  sight)  are  brought  into  existence. 
When  the  loan  is  paid  off,  there  is  created  a  demand  for 
an  equal  amount  of  exchange  (usually  at  sight)  with 
which  to  pay  off  the  sixty  and  ninety-day  bills  originally 
drawn,  and  which,  as  they  mature,  are  presented  at  the 
office  of  the  drawee  for  payment. 

Demand,  IV.  Interest  and  Dividend  Remittances.  — ■ 
The  next  great  demand  for  exchange  to  be  considered 
originates  from  the  necessity  on  our  part  of  remitting 
abroad  interest  and  dividends  on  American  bonds  and 
stocks  held  in  Europe.  The  present  amount  of  such 
remittances,  of  course,  is  considerably  less  than  it  was 
prior  to  the  great  liquidation  of  foreign-held  "  Ameri- 
cans "  caused  by  the  War,  but  does,  nevertheless,  still 
call  for  very  considerable  amounts  of  exchange. 

Nor  does  it  make  any  difference  whether  the  foreign- 
owned  American  securities  are  held  on  this  side  of  the 
water  or  the  other,  or  whether  the  instructions  of  the 
foreign  owners  are  that  the  interest  and  dividends  be 
immediately  remitted  abroad  or  be  credited  to  the  owner's 
American  bank  account.  Sooner  or  later  the  money 
must  be  sent  abroad  —  either  by  having  the  foreign 
owners  draw  in  dollars  on  their  accumulating  American 
balances  or  by  direct  remittances  of  banker's  sterling 
exchange  from  this  side. 

Under  this  head,  too,  must  be  included  the  profits 
on  foreign-owned  American  enterprises  not  publicly 
represented  by  stocks  and  bonds.  Of  many  a  peach 
orchard  in  Oregon  and  many  a  gold  mine  in  Colorado 
the  profits  must  annually  be  sent  over  to  the  other  side. 


SOURCES   OF  SUPPLY  AND  DEMAND        23 

To  a  greater  extent  than  is  generally  appreciated  foreign 
capital  is  at  work  here  and  there  in  the  United  States 
earning  substantial  returns  for  its  foreign  owners. 

Demand,  V.  International  Services  Rendered  to  Us. 
—  Again,  there  must  be  considered  the  foreign  insur- 
ance companies  doing  business  in  the  United  States, 
the  foreign  steamship  companies  carrying  American 
overseas  traffic,  and  the  various  other  important  services 
rendered  us  from  abroad  —  such  for  instance  as  the 
maintenance  and  entertainment  of  Americans  travelling 
or  resident  in  Europe.  Of  these  the  aggregate  is,  of 
course,  very  much  larger  than  anything  in  the  way  of 
services  rendered  by  us.  No  figures  of  any  sort  are 
available  as  to  the  amount  of  the  earnings  of  the  foreign 
fire  and  marine  insurance  companies  doing  business  in 
the  United  States,  or  as  to  the  annual  bill  for  freights  paid 
by  us  to  foreign  ship  owners,  or  as  to  what  Americans 
spend  annually  on  the  other  side,  but  certain  it  is  that 
these  items  alone  run  well  up  into  the  hundreds  of 
millions. 

There  seems  to  be  a  disposition  on  the  part  of  most 
commentators  on  the  subject  to  include  among  the  ser- 
vices mentioned  above,  and,  indeed  particularly  to 
emphasize,  the  commissions  charged  American  importers 
by  the  London  banks  for  "  accepting  "  drafts  drawn  on 
London  against  shipments  of  merchandise  to  the  United 
States.  The  volume  of  such  business,  it  is  true,  is  large, 
but  so  small  is  the  commission  charged  that  the  total 
of  what  we  pay  London  each  year  on  this  account  can 
hardly  run  into  really  large  figures,  as  such  figures  go. 
And,  of  course,  with  the  increase  of  American  prestige  in 


24  FOREIGN   EXCHANGE  EXPLAINED 

world  banking,  it  is  becoming  less  and  less  necessary  for 
us  to  call  upon  London  for  such  service. 

Demand,  VI.  Remittances  by  Foreigners  Resident. 
—  Finally,  there  is  to  be  considered  the  demand  for 
exchange  originated  by  the  constant  remittances  of  for- 
eigners resident  in  the  United  States.  Even  in  the  case 
of  an  alien  who  settles  in  this  country  with  the  intention 
of  remaining  here  there  is  generally  some  one  in  the  old 
country  to  whom  he  will  send  money,  while  in  the  case 
of  an  alien  merely  temporarily  resident,  it  is  not  in- 
frequent that  everything  he  earns  over  a  mere  pittance 
for  living  expenses  is  sent  home. 

The  form  of  remittance,  of  course,  and  the  fact  that 
the  individual  amounts  sent  are  generally  small,  makes 
no  difference.  A  banker  who  has  sold  a  hundred  little 
drafts  on  Italy  for  a  hundred  lire  each  has  to  go  out  and 
find  some  one  who  will  sell  him  a  bill  for  10,000  lire  with 
which  to  replenish  his  account.  With  the  post  office  it 
is  the  same  thing.  Postal  orders  are  nothing  else  than 
orders  to  a  foreign  agent  to  pay  out  money.  Their  issue 
on  any  given  point  in  any  number,  even  if  the  amounts 
are  small,  must  inevitably  be  followed  by  the  sending  over 
of  a  reimbursing  draft  in  pounds  or  francs  or  lire  as  the 
case  may  be. 


7 1  -lb  t 


CHAPTER  V 

THE  RISE  AND  FALL  OF  THE  EXCHANGES 

The  rate  of  exchange  between  two  countries,  being  the 
price  of  the  money  of  the  one  expressed  in  terms  of  the 
other,  is  influenced,  like  the  price  of  anything  else,  by 
the  ancient  and  honorable  law  of  supply  and  demand. 
When  there  is  more  exchange  offered  at  any  given  point 
than  there  is  a  demand  for,  the  rate  has  a  tendency  to  go 
down.  When  there  is  more  buying  than  there  is  selling, 
the  chances  are  that  the  rate  will  go  up. 

We  have  seen  in  the  last  chapter  what  brings  exchange 
into  existence  and  what  causes  a  demand  for  exchange. 
Let  us  now  look  over  these  various  factors  and  see  how  the 
rate  of  exchange  is  practically  affected  by  them. 

The  Movement  of  Merchandise.  —  Taking  first  mer- 
chandise exports  and  imports,  it  is  here  that  we  have 
what  is  really  the  dominant  influence  on  the  broad  move- 
ment of  the  exchange  market.  International  security 
transactions,  suddenly  creating  large  amounts  of  bills 
or  a  demand  for  a  large  amount  of  bills,  may  have  the 
effect  of  temporarily  driving  rates  sharply  down  or  up ; 
but,  over  a  considerable  period  of  time,  what  generally 
controls  the  level  of  exchange  is  the  merchandise  move- 
ment. If,  for  example,  for  every  pound  sterling  of  ex- 
change created  by  the  import  of  merchandise  there  is 

25 


26  FOREIGN  EXCHANGE   EXPLAINED 

created  a  demand  for  two  pounds  sterling  by  reason  of 
merchandise  exports,  it  is  very  evident  that  the  rate  of 
exchange  is  likely  to  go  up.  Other  factors,  such  as  sales 
of  securities  abroad  or  loans  made  by  the  foreign  markets 
to  ours  may  tend  temporarily  to  increase  the  supply  of 
exchange  to  pretty  nearly  the  level  of  requirements,  but 
taking  it  by  and  large  the  effect  of  the  constant  disparity 
in  the  merchandise  movement  is  sure,  sooner  or  later, 
to  force  a  generally  higher  level  of  exchange  rates. 

There  are  times,  of  course,  when  bills  of  exchange 
created  by  merchandise  exports  come  flooding  into  the 
market  and  force  a  sudden  sharp  decline  in  rates,  but  as 
a  general  thing  the  supply  of  mercantile  exchange  feeds 
into  the  market  slowly  and  is  absorbed  without  exerting 
much  of  an  immediate  visible  effect.  Even  in  the  Fall, 
when  bills  drawn  against  wheat,  cotton,  and  other  prod- 
uce come  into  the  market  in  particularly  heavy  volume, 
the  effect  is  apt  to  be  less  than  might  be  expected.  As  a 
matter  of  fact,  the  sale  of  a  large  part  of  the  bills  drawn 
against  merchandise  exports  each  Fall  is  made  during  the 
previous  spring  for  "  future  delivery."  Exporters  who 
know  that  in  the  course  of  a  few  months  they  will  be 
shipping  large  amounts  of  merchandise  and  offering  bills 
drawn  against  them,  are  apt  to  take  this  method  of  pro- 
tecting themselves  against  having  to  sell  their  bills  on 
a  low  exchange  market. 

Of  this  process  of  selling  produce  bills  for  "  future 
delivery,"  the  effect  is  naturally  to  stabilize  rates.  The 
bills,  it  is  true,  come  on  the  market  all  at  one  time,  but 
the  rate  at  which  they  are  to  be  taken  having  been 
arranged  many  months  previously,  the  current  rate  is 


THE  RISE  AND   FALL  OF  THE  EXCHANGES    27 

not  affected  to  anything  like  the  degree  to  which  it 
otherwise  would  be  affected. 

Security  Exports  and  Imports.  —  Security  exports  and 
imports,  while  less  important  in  their  influence  on  the 
level  of  exchange  than  merchandise  exports  and  im- 
ports, bring  about  much  more  sudden  and  violent  fluctu- 
ations in  rates.  International  transactions  in  shares  and 
bonds  often  run  up  into  very  big  figures  within  the  course 
of  a  few  days,  following  which  there  is  apt  to  be  suddenly 
thrown  on  the  market  a  large  supply  of  bills  or,  on  the 
other  hand,  to  be  created  an  insistent  demand  for  bills 
which  will  drain  the  market  dry.  Something  happens, 
for  instance,  to  start  London  selling  American  stocks  — 
something  not  of  primary  importance,  but  enough  to  cause 
uneasiness  and  a  certain  amount  of  liquidation  of  specula- 
Hive  holdings.  In  the  course  of  three  or  four  days,  under 
ouch  circumstances,  it  is  nothing  unusual  to  have  Europe 
sell  us  five  or  ten  million  dollars  of  our  own  stocks  and 
bonds.  When  it  comes  to  making  payment,  the  demand 
for  such  an  amount  of  exchange  will  very  probably  be 
enough  to  drive  the  market  up  sharply,  at  least  for  the 
time  being. 

Conversely,  when,  for  instance,  a  syndicate  bringing 
out  a  big  bond  issue  in  New  York  places  a  substantial 
proportion  of  it  abroad,  the  drawing  of  exchange  which 
results  is  likely  to  have  the  effect  of  driving  the  rate 
sharply  down.  Though  here,  too,  as  in  the  case  of  bills 
drawn  against  produce  shipped  in  the  Fall,  it  must  be 
borne  in  mind  that  the  drawers  of  the  bills  will  do 
everything  possible  to  avoid  having  to  sell  them  on  a 
falling    exchange    market.     If    they    knew    some    time 


28  FOREIGN  EXCHANGE  EXPLAINED 

previously  that  they  would  be  drawing  the  bills,  the 
chances  are  that  they  will  have  sold  them  "  for  future 
delivery."  In  any  case  the  bills  are  not  likely  to  be 
thrown  out  on  the  market  all  at  once,  but  rather  to  be 
carefully  fed  out  as  the  market  will  take  them,  even  if 
this  operation  takes  considerable  time. 

The  Money  Market  Influence.  —  Next  in  importance 
to  security  purchases  and  sales  as  a  cause  of  sharp 
fluctuations  in  the  rate  of  exchange  comes  the  making  of 
short-term  loans  of  foreign  money  to  this  market  and 
the  repayment  of  such  loans.  A  condition,  we  will  say, 
develops  when  the  rate  for  ninety-day  money  in  New 
York  rises  substantially  above  the  ninety-day  rate  in 
London.  Almost  immediately  the  London  bankers 
begin  to  put  out  money  here  —  which,  as  is  fully  ex- 
plained in  Chapter  13,  means  that  their  New  York 
banking  agents  begin  drawing  ninety-day  drafts  on  the 
banks  abroad  who  are  doing  the  lending.  These  drafts, 
of  course,  to  make  the  money  available  on  this  side  of  the 
water,  have  to  be  sold  in  the  New  York  market.  If  it 
happens  that  there  is  a  good  demand  for  exchange  at 
the  moment,  rates  will  possibly  not  be  so  very  much 
affected.  If,  however,  as  is  often  the  case,  large  amounts 
of  these  "  loan  bills  "  are  projected  on  to  a  market  in 
which  the  demand  for  exchange  is  not  particularly 
strong,  a  very  sharp  recesssion  in  rates  is  likely  to  be 
brought  about.  So  marked,  indeed,  does  the  recession 
often  become  that  continuance  of  the  loaning  operations 
is  rendered  impossible.  It  is  necessary,  in  order  that 
foreign  money  be  profitably  loaned  here,  that  a  fairly 
high  rate  of  exchange  be  realized  from  the  sale  of  the 


THE  RISE  AND   FALL  OF  THE  EXCHANGES    29 

bills  drawn  on  the  lending  banker  abroad  at  the  begin- 
ning of  the  operation. 

But  even  more  of  an  influence  on  the  exchange  market 
is  the  repayment  of  these  short-term  foreign  loans  when 
they  come  due.  If  it  happens  that  not  very  much  was 
borrowed  at  the  time  and  that  you  and  possibly  one  or 
two  others  are  the  only  bidders  for  demand  exchange 
with  which  to  make  repayments,  the  chances  are  that 
you  will  be  able  to  secure  your  "  cover  "  without  running 
up  the  market  too  far.  If,  on  the  other  hand,  the  loan 
you  are  trying  to  pay  off  comes  due  about  the  same  time 
as  a  number  of  similar  loans  all  of  which  have  also  to 
be  "  covered,"  the  possibilities  of  your  having  to  pay 
a  very  sharp  advance  in  the  rate  are  excellent.  These 
foreign  loan  transactions  run  into  large  figures,  a  loan 
of  £10,000  being  about  the  minimum.  If,  then,  buyers 
appear  in  the  exchange  market  for  considerable  amounts 
of  bills  at  a  time  when  foreign  loans  previously  made  are 
known  to  be  running  off,  the  inference  is  immediately 
drawn  that  they  are  trying  to  buy  "  cover."  And,  with 
that  rare  charity  which  marks  all  dealings  in  foreign 
exchange,  those  who  have  bills  to  sell  make  it  just  as 
hard  as  they  possibly  can  for  those  who  have  bills  to 
buy.  Securing  "  cover  "  for  a  loan  that  has  matured 
or  that  is  about  to  mature  is  an  operation  that  allows 
of  no  delay.  If  sellers  hold  back  and  protest  that  they 
have  no  bills  to  sell  except  at  an  advance  in  price,  there 
is  usually  nothing  left  to  do  but  to  pay  the  price. 

Some  of  the  sharpest  movements  that  occur  in  the 
exchange  market  are  brought  about  exactly  in  this 
way.     For  which  reason,  conservative  borrowers,  now- 


3° 


FOREIGN  EXCHANGE  EXPLAINED 


adays,  when  they  enter  the  market  for  foreign  banking 
capital,  frequently  protect  themselves  at  the  time  they 
make  the  loan  by  buying  demand  exchange  to  be  de- 
livered to  them  at  a  specified  time  in  the  future.  Thus  a 
stock  brokerage  house  in  New  York  which  is  borrow- 
ing £20,000  for  ninety  days  from  the  New  York  agent 
of  a  London  bank,  and  which  knows  that  in  ninety  days 
it  must  secure  a  sight  draft  on  London  for  £20,000  with 
which  to  pay  off  the  loan,  might  contract  for  the  delivery 
to  it  at  the  end  of  ninety  days  of  the  required  sight  draft. 
The  "  risk  of  exchange  "  would  thus  be  eliminated,  the 
borrower  being  able  to  tell  in  advance  exactly  what  the 
loan  was  going  to  cost  him. 

If  all  our  borrowing  abroad  were  done  on  this  basis, 
the  effect  on  the  exchange  market  would  be  much  less 
than  it  is.  Unfortunately,  however,  most  borrowers, 
instead  of  protecting  themselves  by  buying  a  "future," 
take  a  chance  on  the  exchange  market  in  the  hope  that 
during  the  life  of  the  loan  the  rate  may  go  down.  Not 
infrequently  they  win  out  and  are  eventually  able  to 
"  cover  "  at  so  low  a  rate  as  to  make  the  loan  cost  them 
little  or  nothing.  More  often,  however,  it  happens 
that  when  the  loan  comes  due  —  and  this  is  particularly 
true  if  there  were  a  number  of  loans  of  similar  character 
made  at  the  same  time  —  there  ensues  a  scramble  to 
secure  the  needed  "  cover,"  in  the  course  of  which  the 
bidders  run  the  market  up  on  each  other  anywhere 
from  a  quarter  to  three  quarters  of  a  cent  in  the  pound 
sterling.  Then  when  the  urgent  bidding  has  all  been 
satisfied,  with  corresponding  pleasure  and  profit  to  the 
sellers,  the  market  is  allowed  to  slump  back  again. 


THE  RISE  AND   FALL  OF  THE  EXCHANGES    31 

Interest  and  Dividends.  —  Of  the  effect  on  the  ex- 
change market  of  the  payment  of  interest  and  dividends 
on  foreign-held  American  securities,  and  of  the  pay- 
ments which  we  have  to  make  for  freights,  insurance, 
and  other  services  rendered  us,  it  need  only  be  said 
that  these  factors  constitute  a  continuous  sustaining 
influence  on  rates  which  only  occasionally  becomes 
so  marked  as  to  attract  any  attention.  All  the  time 
there  is  going  on  the  sending  of  money  abroad  to  pay 
interest  and  dividends  and  to  settle  the  claims  of  for- 
eigners against  us  for  various  services  rendered.  Mostly, 
this  takes  the  form  of  a  quiet,  steady  buying  of  bills  as 
they  are  offered,  but  every  once  in  a  while  this  buying 
assumes  an  urgency  which  cannot  be  concealed.  That 
effect,  for  instance,  is  often  produced  by  the  maturing 
of  a  large  issue  of  bonds  which  happen  to  be  extensively 
held  abroad.  Again,  around  the  first  of  the  year  and 
just  before  the  first  of  July  (the  two  great  interest 
periods)  there  often  develops  a  strong  and  urgent  de- 
mand for  exchange  with  which  to  make  remittances 
for  interest.  The  first  of  the  year,  too,  is  a  great 
time  for  the  foreigners  who  live  in  this  country  to 
send  money  home,  the  volume  of  these  remittances  often 
reaching  a  point  where  the  resulting  demand  for  bills 
of  exchange  sweeps  the  market  bare  and  causes  a  sharp 
advance  in  the  quotation. 

The  movement  of  the  exchange  market,  it  will  be 
seen  from  the  foregoing,  is  the  resultant  of  a  number  of 
forces,  some  operating  to  drive  it  up  and  some  operating 
to  drive  it  down.  To  be  able  to  distinguish  these  forces 
and,  more  particularly,  to  be  able  to  judge  their  relative 


32  FOREIGN  EXCHANGE  EXPLAINED 

market  importance,  is  to  be  able  to  form  an  intelligent 
opinion  as  to  the  course  exchange  is  likely  to  take.  More 
than  that  can  be  expected  of  no  man,  the  exchange 
market,  like  the  wind,  having  the  habit  of  blowing 
whither  it  listeth. 


CHAPTER  VI 

PRINCIPAL   RATES   OF   EXCHANGE 

Discussion,  in  a  work  of  this  kind,  of  all  the  various 
rates  of  exchange  prevailing  between  all  the  countries 
that  do  business  with  one  another  would  be  out  of 
place.  Three  rates,  however  —  New  York-London, 
New  York-Paris  and  New  York-Berlin  —  are  of  such 
particular  importance  that  any  work  on  the  subject  of 
foreign  exchange  from  the  American  viewpoint  would 
be  incomplete  without  a  description  of  them.  For  de- 
scription how  to  figure  in  pounds,  marks,  and  francs, 
see  Appendix. 

New  York-London.  —  In  New  York,  the  rate  of  ex- 
change on  London  is  the  price  in  American  dollars  and 
cents  which  must  be  paid  for  each  pound  sterling  of  a 
sizable  draft,  payable  on  presentation,  drawn  by  a  banker 
in  New  York  on  a  banker  in  London.  The  "  rate  on 
London,"  it  is  to  be  borne  in  mind  (and  this  is  equally 
true  of  the  "  rate  on  Paris  "  or  the  "  rate  on  Berlin  "), 
applies  only  to  a  draft  of  considerable  size,  drawn  by 
a  banker  on  a  banker,  and  payable  on  presentation. 

Between  New  York  and  London  fluctuations  in  the 

rate  of  exchange  were  for  years  quoted  in  eighths  of  a 

cent  per  pound  sterling,    as   for   instance  4.86,    4.863-, 

4.86|.     Of   recent   years,   however,   there   has   been   a 

d  33 


34  FOREIGN  EXCHANGE  EXPLAINED 

strong  tendency  to  quote  the  rate  "  closer,"  as  for  in- 
stance 4.86,  4.8605,  4.8610,  the  progression  in  this  case 
being  by  one-twentieth  of  a  cent  per  pound  sterling 
instead  of  by  one-eighth  of  a  cent,  as  above.  On  £10,000, 
which  is  a  sort  of  unit  of  dealing  among  the  banking 
houses,  a  difference  of  one-eighth  of  a  cent  in  the  rate 
makes  a  difference  of  $12.50.  One-twentieth  of  a  cent 
in  the  rate,  "  five  points,"  as  they  call  it  in  the  exchange 
market,  means  a  difference  of  $5  on  £10,000. 

During  the  course  of  a  normal  day's  business  in  ex- 
change when  no  particularly  strong  forces  are  operating 
one  way  or  the  other,  a  fluctuation  of  "  fifteen  points  " 
(three- twentieths  of  a  cent  per  pound  sterling)  is  about 
what  may  reasonably  be  expected.  Thus,  in  the  morn- 
ing, the  market  might  open  4.86,  run  up  to  4.8610, 
sell  off  at  noon  to  4.8605,  and  finally  close  at  4.8615. 
The  difference  between  the  day's  highest  and  lowest 
price  of  a  £10,000  draft,  it  will  thus  be  seen,  would, 
under  the  conditions  noted,  be  exactly  $15  —  a  very 
much  smaller  amount  than  most  people  who  have  not 
given  the  matter  much  attention  have  it  in  their  minds 
is  involved  in  an  average  day's  fluctuation. 

New  York -Berlin. — Reichsmarks,  the  currency  of 
the  German  Empire,  are  quoted  in  the  New  York 
market  at  so-and-so-many  American  cents  for  each  four 
reichsmarks  —  or  "  marks  "  as  they  are  generally  called. 
Why  the  quotation  is  for  four  marks  instead  of  one, 
no  one  pretends  to  be  able  to  explain. 

In  marks,  the  progression  of  rates  is  by  sixteenths 
of  an  American  cent  to  each  four  marks,  as,  for  instance 
95,  95ts,  95f-      These  rates,  however,  not  being  sutn- 


PRINCIPAL  RATES  OF  EXCHANGE  35 

ciently  "  close  "  in  the  case  of  large  amounts,  are  often 
modified  by  adding  or  subtracting  small  percentages  of 
the  amount  of  dollars  involved.  Thus,  a  banker  not 
wanting  to  sell  at  95^  and  yet  not  caring  to  charge  as 
much  as  95-g-,  might  fix  a  price  of  95^5-  plus  -gV  Or,  in  a 
case  where  a  banker  was  willing  to  pay  95^  for  exchange 
offered  him  but  not  quite  willing  to  pay  95^-,  he  might 
offer  to  pay  95!  less  ■$?. 

This  modifying  percentage,  it  is  carefully  to  be  noted, 
is  a  thing  separate  and  apart  from  the  rate  proper, 
being  figured  on  the  amount  of  dollars  after  the  con- 
version at  the  regular  rate  has  been  made.  Thus  if 
you  have  to  find  the  amount  of  dollars  required  to 
buy  M.  100,000  at  95^  less  -^  you  go  ahead  first  and 
find  the  amount  of  dollars  at  95-5-  (cents  to  each  four 
marks).  From  the  resulting  amount  of  dollars  you 
subtract  ■£?  of  one  per  cent  of  itself,  which  is  the  result 
you  want. 

On  small  amounts,  two  rates  such,  for  instance,  as 
95rg-  less  -£2  and  95  plus  -£?  are  practically  the  same,  but 
where  considerable  sums  are  involved  the  difference  is 
appreciable.  By  giving  the  arithmetic  of  the  matter 
a  little  thought,  it  will  plainly  be  seen  that  a  fraction 
in  the  rate  (which  is  less  than  100)  is  a  little  more  than 
the  same  fraction  expressed  as  a  percentage  (reckoned 
on  100).  For  example,  convert  M.  100,000  at  gSvs  less 
snr  and  you  get  $23,758.20.  At  95  plus  -£%  the  result  is 
$23,757.43.  The  first  rate  is  higher  than  the  second  by 
TfV  in  the  rate,  which  is  more  than  the  rg-  per  cent  which 
comes  off. 

New  York-Paris.  —  In  the  case  of  pounds  and  marks, 


36  FOREIGN  EXCHANGE  EXPLAINED 

the  quotation  of  the  rate  at  New  York,  as  we  have  seen, 
is  in  terms  of  so-and-so-many  dollars  to  the  pound  and 
of  such-and-such  a  fraction  of  a  dollar  to  the  mark. 
In  the  case  of  francs,  however,  for  some  mysterious 
reason  which  no  exchange  man  has  ever  attempted  to 
explain,  the  quotation  at  New  York  is  made  in  terms  of 
so-and-so-many  francs  to  each  dollar.  In  the  case  of 
francs,  in  other  words,  we  make  the  exception  of  quoting 
in  the  currency  of  the  country  on  which  the  drafts  are 
drawn.  Thus,  at  New  York,  a  quotation  for  francs 
of  5-i8i  means  that  5  francs  i8i  centimes  can  be  bought 
for  one  American  dollar. 

Now  it  is  plain  that  if  that  is  the  case,  the  higher 
the  rate  for  francs  apparently  rises,  the  lower  it  actually 
becomes.  Take  a  concrete  case :  You  want  to  invest 
$1000  in  a  draft  on  Paris.  The  rate  is  5.18!-.  That 
means  that  your  $1000  will  buy  5181.25  francs.  Suppose 
now  the  rate  falls  to  5.18-f.  Your  $1000  will  now  buy 
5187.50  francs,  6.25  francs  more  than  it  would  before. 
The  change  in  the  rate  from  5-i8i  to  5-i8f,  in  other 
words,  represents  a  decline  —  you  can  buy  more  francs 
for  the  same  amount  of  dollars. 

In  the  quotation  for  francs,  under  normal  exchange 
market  conditions,  the  progression  is  by  f  of  one  centime 
(a  centime  is  a  hundredth  of  a  franc)  to  each  dollar,  as 
for  instance,  5 . 1 8£,  5 . 1 8f ,  5 . 1 9^.  As  in  the  case  of  marks, 
however,  when  large  amounts  are  involved  these  rates  are 
modified  by  adding  and  subtracting  small  percentages 
on  the  dollar  amounts.  Thus  a  banker,  not  being 
willing  to  buy  at  5.18I  and  yet  being  willing  to  pay  a 
little  better  than  5-i8f,  might  offer  to  pay  5.i8|Tessrff. 


PRINCIPAL  RATES  OF  EXCHANGE  37 

On  the  other  hand,  a  banker  having  francs  to  sell  and  not 
being  willing  to  sell  at  5-i8f  but  hardly  wanting  to  charge 
5.18I,  might  offer  to  sell  at  5.18!  plus  tg- 

These  modifying  percentages,  it  is  to  be  noted,  are 
separate  from  the  rate  proper,  being  figured  on  the 
amount  of  dollars  after  the  conversion  at  the  regular 
rate  has  been  made.  Thus,  if  you  have  to  find  the 
amount  of  dollars  required  to  buy  fc.  100,000  at  5-i8i  less 
Yt,  you  go  ahead  first  and  find  the  amount  of  dollars 
at  5.i8£  (francs  to  one  dollar).  From  the  resulting 
amount  of  dollars,  you  then  subtract  ^s  of  one  per  cent 
of  itself,  which  is  the  result  you  want. 

By  a  little  figuring,  it  will  be  seen  that  a  difference 
of  f  of  one  centime  in  the  rate  is  just  a  trifle  less  than 
i  of  one  per  cent  figured  on  the  amount  of  dollars  in- 
volved. The  two  rates  5.18!  less  rg-  and  5.18!  plus  ys  are 
thus  practically  identical,  so  far  as  small  amounts  are 
concerned.  In  transactions  involving  say  fc.  100,000  or 
more,  however,  the  difference  is  appreciable.  At  5.18^ 
less  Tt,  a  hundred  thousand  francs  would  cost  $19,288.30 ; 
at  5-i8f  plus  iV  the  cost  would  be  $19,289.15.  The 
second  rate  is  higher  than  the  first  by  £  of  one  per  cent 
(figured  on  the  amount  of  dollars)  which  more  than 
counterbalances  the  difference  in  the  rate  of  f  of  one 
centime  in  favor  of  rate  number  one. 

In  francs,  then,  a  fraction  in  the  rate  is  less  than  the 
same  fraction  expressed  as  a  percentage.  In  marks 
it  is  the  other  way  around.  In  sterling  (in  which  the  bulk 
of  exchange  figuring  is  done)  there  are,  may  Allah  be 
praised,  none  of  these  qualifying  fractions  to  be  reckoned 
with. 


CHAPTER  VII 

THE   DIFFERENT   KINDS   OF    EXCHANGE  —  BANKERS'   AND 
COMMERCIAL 

Concerning  the  different  kinds  of  bills  of  exchange 
daily  traded  in  at  a  market  like  New  York  there  exists 
so  much  misunderstanding  and  misapprehension,  that 
it  seems  well  worth  while  to  devote  a  chapter  to  the 
subject.  The  bills  themselves,  however,  it  is  to  be  noted, 
rather  than  the  conditions  which  bring  them  into  exist- 
ence and  under  which  they  are  bought  and  sold  (dealt 
with  elsewhere)  are  the  subject  of  the  discussion. 

In  the  first  place,  it  is  to  be  noted  that  in  the  parlance 
of  the  exchange  market  the  term  "  bill  "  applies  to  any 
kind  of  an  order  to  pay  out  foreign  money,  whether 
such  order  is  made  by  a  banker  or  a  merchant,  whether 
the  order  is  to  pay  out  the  money  immediately  or  at 
the  end  of  a  specified  time,  whatever,  in  fact,  may  be 
the  various  conditions  that  attach. 

In  the  next  place  it  is  to  be  noted  that  in  the  exchange 
market  the  terms  "  Checks,"  "  Demand  Drafts,"  and 
"  Sight  Drafts  "  are  used  interchangeably  as  signifying 
an  order  to  pay  out  money  upon  presentation  of  such 
order.  "  Short  Bills  "  are  bills  having  not  over  30  days 
to  run.  The  term  "  Long  "  is  applied  to  all  bills  run- 
ning over  thirty  days. 

33 


DIFFERENT   KINDS   OF   EXCHANGE 


39 


For   the  purposes  of   the   subject  under  discussion, 
bills  of  exchange  may  be  classified  as  follows : 

(Cable  Transfers 
Short  Bills 
Long  Bills 


Commercial 


'  Clean 


(  Documentary 


Short 

Long 

'  Short 

,  Long 


'  Documents  on  acceptance 
Documents  on  payment 


Bankers'  Cable  Transfers  and  Short  Bills.  —  Cable 
transfers,  strictly  speaking,  should  hardly  be  classified 
as  bills  of  exchange  and  yet  are  essentially  the  same, 
the  only  difference  being  that  in  the  case  of  a  "  cable  " 
the  instructions  to  pay  out  the  money  on  the  other 
end  are  telegraphed  instead  of  being  written  on  a  piece 
of  paper  called  a  draft.  When  you  buy  a  draft,  say  on 
London,  you  pay  a  banker  here  so-and-so-many  dollars 
and  in  return  he  gives  you  a  piece  of  paper  addressed  to 
some  correspondent  bank  in  London  where  he  carries  a 
balance,  which  paper  instructs  that  correspondent  bank 
to  pay  out  so-and-so-many  pounds  sterling  to  you  or  to 
your  order.  When  you  buy  a  cable  exactly  the  same  thing 
happens  except  that  the  banker  here,  instead  of  giving 
you  a  written  order  on  his  correspondent  abroad  in  return 
for  your  money,  agrees  to  wire  his  correspondent  to  pay 
out  the  equivalent  number  of  pounds  sterling  to  whom- 
soever in  London  you  may  designate.     In  the  case  of  a 


4o  FOREIGN  EXCHANGE  EXPLAINED 

sight  draft  the  actual  payment  of  the  money  abroad  is  not 
made  until  the  draft  arrives  and  is  presented,  which 
is  not  until  a  week  or  ten  days  after  the  draft  is  bought 
and  paid  for  in  New  York.  In  the  case  of  a  cable  the 
payment  abroad  is  made  immediately  —  unless  it  is 
too  late  in  the  day,  in  which  case  it  goes  over  until  the 
next  morning. 

Bankers'  Long  Bills.  —  Bankers'  Long  Bills  are  drafts 
drawn  by  bankers  here  on  bankers  abroad,  usually 
payable  sixty  or  ninety  days  "  after  sight  "  —  that  is 
to  say,  sixty  or  ninety  days  (plus  the  usual  three  days  of 
grace)  after  the  draft  has  been  presented  to  the  party 
on  whom  it  is  drawn  and  "  accepted  "  by  him.  Until 
it  has  thus  been  "  accepted  "  by  the  drawee,  a  "  long  " 
bill  has  no  maturity  date.  The  maturity  date  being 
determined  by  the  date  the  bill  is  accepted  (the  sooner 
the  bill  is  accepted,  naturally,  the  sooner  it  will  come  due), 
the  holder  of  such  a  bill  will  always  take  good  care  that 
it  is  presented  to  the  party  on  whom  it  is  drawn  at  the 
earliest  possible  moment.  Besides  which  there  is  to  be- 
considered  the  fact  that  until  a  long  bill  is  accepted, 
only  the  maker  is  liable  for  payment  while,  after  it  has 
been  accepted,  the  party- accepting  the  bill  is  liable  as 
well.  (For  a  drawee  to  accept  a  bill  means  for  him  to 
write  across  its  face,  over  his  legal  signature,  "  Accepted, 
payable  on  such-and-such  a  date.") 

Bankers'  Long  Bills,  are  also  sometimes  issued  pay- 
able so-and-so-many  days  after  date  instead  of  after 
sight.  In  such  case  acceptance  is  of  course  not  necessary 
to  fix  the  due  date.  Practically,  however,  on  account  of 
the  additional  protection  afforded,  acceptance  is  almost 


DIFFERENT   KINDS  OF   EXCHANGE         41 

invariably  obtained  from  the  drawee  at  the  earliest 
possible  moment. 

Commercial  Clean  Bills.  —  Commercial  bills  are  bills 
drawn  by  mercantile  houses  here  either  on  mercantile 
houses  abroad  or  on  banks  abroad.  They  are  divided 
into  two  classes,  "  clean  "  and  "  documentary,"  the  latter 
class  being  infinitely  the  more  important.  A  clean  bill 
is  a  draft  that  has  no  bills  of  lading  or  other  documents 
attached  to  it.     A  documentary  bill  is  one  that  has. 

So  far  as  maturity  is  concerned,  commercial  clean 
bills  that  are  drawn  payable  sixty  or  ninety  days  "  after 
sight  "  are  in  exactly  the  same  position  as  bankers' 
bills  —  that  is  to  say,  they  get  a  maturity  date  only 
after  they  have  been  accepted.  Also,  until  a  commercial 
clean  bill  has  been  accepted  it  is  "  one-name  paper." 
After  acceptance  it  becomes  "  two-name  paper." 

As  previously  stated,  this  chapter  is  not  a  discussion 
of  the  circumstances  surrounding  the  issue  of  the  various 
kinds  of  bills  of  exchange.  With  regard  to  these  clean- 
commercial  bills,  however,  it  is  to  be  noted  in  passing 
that  the  only  security  that  the  banker  buying  them  gets 
is  the  name  of  the  drawer  and,  after  acceptance,  the 
name  of  the  drawee.  They  are  not  in  any  Way  secured 
by  the  merchandise  against  which  they  are  supposedly 
drawn. 

Commercial  Documentary.  —  Documentary  commer- 
cial bills,  on  the  other  hand,  are  invariably  secured  by 
merchandise.  As  was  pointed  out  in  Chapter  IV  the 
shipper  of  cotton  in  Alabama  or  the  shipper  of  grain 
in  Illinois  attaches  to  the  draft  he  draws  on  the  consignee 
or  the  consignee's  bank,  the  bill  of  lading,  which,  in 


42  FOREIGN  EXCHANGE  EXPLAINED 

itself,  carries  possession  of  the  goods.  The  bill  of  lading 
is  the  steamship  or  railroad  company's  receipt  for  the 
goods.  Only  the  party  which  holds  the  bill  of  lading 
can  get  possession  of  the  goods  when  they  arrive.  The 
banker  who  buys  a  documentary  draft,  it  will  thus  be 
seen,  is  protected  against  loss  not  only  by  the  name  of 
the  maker  of  the  bill  but  by  what  virtually  amounts  to 
possession  of  the  goods  themselves. 

To  make  clear  his  title  to  the  goods,  the  banker 
often  demands  of  the  party  from  whom  he  buys  the 
bill  a  certificate  hypothecating  the  goods  to  him.  This 
"  hypothecation  certificate "  may  either  be  attached 
to  the  draft  itself,  or,  if  originally  issued  in  blanket  form 
to  cover  all  transactions  between  that  particular/  ex- 
porter and  that  particular  banker,  is  apt  to  be  retained 
by  the  banker. 

Certificates  of  insurance  stating  for  how  much  and  in 
what  company  insurance  has  been  written  are  likely  to 
be  attached,  with  the  other  documents,  to  the  draft. 
No  banker  will  buy  a  documentary  bill  of  exchange  un- 
less he  knows  that  the  insurance  has  been  effected  and 
made  payable  to  him. 

The  more  staple  the  merchandise,  the  more  desirable, 
from  the  banker's  viewpoint,  the  bill  of  exchange. 
The  banker's  security,  after  all,  is  the  merchandise 
underlying  the  transaction.  Naturally,  if.  the  mer- 
chandise is  cotton  or  wheat  or  something  which  has  a 
definite,  realizable  market  value,  the  bill  will  appeal  to 
the  banker  more  than  if  the  underlying  security  is  some 
fancy  article,  the  resale  value  of  which  is  problematical. 

Different  kinds  of  merchandise  are  exported  on  dif- 


DIFFERENT   KINDS  OF   EXCHANGE         43 

ferent  bases.  In  the  case  of  one  kind  of  goods  the 
custom  is  to  draw  at  sight,  in  the  case  of  others  at  seven 
days'  sight,  in  the  case  of  still  others  at  sixty  or  ninety 
days'  sight.  Commercial  drafts  with  a  longer  "  usance  " 
than  ninety  days  are  rarely  seen  in  the  New  York  market. 

"  Acceptance  "  and  "  Payment  "  Bills.  —  Document- 
ary long  bills  divide  themselves  into  two  classes,  those 
which  carry  instructions  that  the  bill  of  lading  (which 
carries  with  it  possession  of  the  goods)  is  to  be  delivered 
to  the  drawee  upon  his  accepting  the  draft,  and  those 
which  carry  instructions  that  the  drawee  is  not  to  get 
the  bill  of  lading  until  he  has  actually  paid  the  draft. 
The  former  class  are  known  as  "  acceptance  bills  " ;  the 
latter  as  "  payments." 

Who  determines  whether  the  draft  shall  be  marked 
"  documents  for  acceptance  "  or  "  documents  for  pay- 
ment "  ?  The  shipper  of  the  goods,  naturally  —  it  is 
his  name  which  is  on  the  draft  and  it  is  on  him  that  the 
banker  will  come  back  if  anything  goes  wrong  with  the 
payment  of  the  draft  on  the  other  end.  He,  therefore, 
is  the  one  to  decide  whether  the  drawee  is  good  enough 
to  receive  the  bill  of  lading  on  his  mere  acceptance  of 
the  draft  or  whether  safety  demands  that  the  drawee 
should  actually  pay  the  draft  before  being  allowed  to 
come  into  possession  of  the  goods. 

It  stands  to  reason,  however,  that  the  banker  who 
buys  the  bill  is  going  to  have  something  to  say  about  it, 
too.  If  the  credit  of  the  drawer  is  sufficiently  good,  the 
banker  may  be  willing  to  take  his  word  for  it  that  the 
documents  can  safely  be  delivered  on  acceptance.  Un- 
less, however,  the  banker  is  willing  to  go  on  the  standing 


44  FOREIGN  EXCHANGE  EXPLAINED 

of  the  drawer  exclusively,  he  (the  banker)  is  apt  to  pass 
judgment  himself  on  whether  the  documents  are  to  be 
delivered  on  acceptance  or  payment.  The  shipper,  of 
course,  is  under  no  obligation  to  mark  the  draft  the  way 
the  banker  wants  him  to,  but,  unless  he  does,  the  banker 
will  simply  refuse  to  buy  the  bill. 

Most  long  commercial  bills  drawn  on  banks  or  on 
bankers  or  on  mercantile  firms  of  known  standing  and 
reputation  are,  in  the  very  nature  of  things,  marked 
"  documents  for  acceptance."  The  fact  that  a  bill  is 
marked  "  documents  for  payment"  is,  however,  no  reflec- 
tion upon  the  drawee.  In  some  lines  of  business,  indeed, 
the  custom  is  to  draw  "  payment  "  drafts  even  where  the 
standing  of  the  drawee  would  seem  fully  to  warrant 
their  being  marked  "  for  acceptance." 

As  the  discount  markets  abroad  take  only  bills  with- 
out documents,  it  stands  to  reason  that  "  acceptance  " 
bills  are  discountable  and  that  "  payment  "  bills  are 
not.  Put  yourself  in  the  position  of  the  London  cor- 
respondent of  an  American  bank  presenting  a  bill  marked 
"  acceptance,"  to  the  drawee.  The  bill  comes  back 
to  you,  accepted,  without  any  documents  attached  to 
it,  the  drawee  having  retained  them.  Provided  that 
the  names  of  the  drawer  and  the  drawee  are  good,  you 
will  have  not  the  slightest  trouble  in  discounting  the 
bill  at  the  current  market  rate. 

But  if  it  was  a  "  payment  "  bill  which  you  presented 
to  the  drawee  and,  when  your  messenger  brings  back 
the  draft,  accepted,  it  still  has  the  documents  attached 
to  it,  you  are  not  in  possession  of  something  you  can  have 
discounted  for  your  New  York  correspondent  and  for- 


DIFFERENT  KINDS   OF  EXCHANGE         45 

get.  On  the  contrary,  it  is  necessary  that  you  have  the 
goods  represented  by  the  bill  of  lading,  "  entered " 
and  taken  care  of.  The  drawee,  very  possibly,  isn't 
going  to  want  the  cotton  or  whatever  it  is  for  some  little 
time  —  possibly  not  for  the  whole  time  the  draft  has  to 
run.  In  the  meantime  it  is  in  your  custody  that  the 
goods  must  remain. 

As  a  matter  of  actual  fact,  however,  "  payment  " 
bills  are  seldom  allowed  to  come  to  maturity  by  the 
drawee.  Long  before  the  bill  comes  due  the  drawee  is 
apt  to  want  to  get  possession  of  the  goods.  How  can 
he  do  so?  Only,  of  course,  by  paying  the  draft.  But 
the  draft,  it  is  objected,  isn't  due.  Well,  that  being  the 
case,  the  holder  says,  you  can  pay  the  face  amount  of 
the  draft,  less  a  rebate  for  the  unexpired  time.  The  bill 
originally  ran  sixty-three  days.  Thirty- three  days  have 
now  passed.  Pay  the  face  amount  less  a  month's  in- 
terest and  we'll  turn  over  to  you  possession  of  the  goods. 

The  rate  at  which  "  payment  "  bills  are  rebated  is 
Jixed  by  custom  at  one-half  of  one  per  cent  above  the 
rate  which  bankers  are  publishing  that  they  will  pay  for 
deposits.  As  the  rate  for  deposits  is  usually  two  per 
cent  under  the  Bank  of  England  discount  rate,  another 
way  of  fixing  the  rebate  rate  on  "  payment  "  bills  is 
to  call  it  \\%  under  the  discount  rate. 

So  far  as  the  relative  value  in  pounds,  shillings,  and 
pence  of  an  accepted  "  payment  "  bill  and  an  accepted 
"  acceptance "  bill  is  concerned,  everything  depends 
upon  when  the  "  payment  "  bill  is  taken  up  under 
rebate  by  the  drawee.  Suppose  the  "  payment  "  bill 
is  taken  up  right  at  the  beginning.     In  that  case  it  would 


46  FOREIGN  EXCHANGE  EXPLAINED 

yield  its  holder  more  cash  than  a  prime  "  acceptance  " 
bill  for  a  similar  amount  running  a  similar  time  would 
yield.  The  payment  bill,  it  must  be  borne  in  mind,  is 
"  rebated,"  whereas  the  acceptance  bill  is  "  discounted," 
and  the  rebate  rate  is  always  less  than  the  discount  rate. 
A  smaller  amount,  to  put  it  another  way,  is  taken  off 
the  face  of  the  "  payment  "  bill  than  is  taken  off  the 
face  of  the  "  acceptance  "  bill. 

Where  a  banker  in  New  York,  for  instance,  knows 
positively  that  a  certain  "  payment "  bill  will  be  taken 
up  under  rebate  immediately  upon  arrival  in  London, 
he  will  pay  a  higher  rate  of  exchange  for  it  than  he  will 
for  a  prime  acceptance  bill  of  like  amount  and  tenor. 
About  most  "  payment "  bills,  however,  the  banker 
can  have  no  such  assurance,  the  chances,  indeed,  being 
that  the  bill  will  be  allowed  to  run  a  considerable  time 
before  the  drawee  elects  to  take  it  up  under  rebate, 
during  all  of  which  time,  of  course,  the  owner  of  the  bill 
.is  out  of  the  use  of  the  money  he  paid  for  it.  "  Pay- 
ment "  bills,  for  that  reason,  normally  command  con- 
siderably lower  prices  in  the  exchange  market  than  do 
bills  which  are  marked  "  doc's  for  acceptance." 


CHAPTER  VIII 

PRICE  RELATIONSHIP  OF  THE  DIFFERENT  KINDS  OF  BILLS 
OF   EXCHANGE 

From  what  was  said  in  the  last  chapter,  it  must  be 
evident  that  the  element  of  credit  enters  largely  into 
the  price  at  which  bills  of  exchange  are  bought  and 
sold.  A  bill  drawn  against  cotton,  for  instance,  we  have 
seen,  is  more  desirable  from  the  banker's  standpoint 
than  a  bill  drawn  against  some  perishable  article  or  some 
article  which  has  an  uncertain  resale  value.  Sim- 
ilarly, the  names  on  a  bill  of  exchange  —  that  is  to  say, 
the  name  of  the  party  who  draws  it  and  the  party 
on  whom  it  is  drawn  —  have  an  important  effect  on  the 
price  at  which  the  bill  can  be  marketed  (turned  into 
dollars  and  cents).  Obviously,  of  two  bills  of  exchange 
against  the  same  kind  of  merchandise  and  of  like  tenor, 
one  drawn  by  an  Ai  shipper  with  an  international  repu- 
tation, and  the  other  drawn  by  some  little  firm  which 
may  be  good  but  is  relatively  unknown,  the  former 
will  sell  at  a  higher  price  than  the  latter.  If,  for  example, 
exchange  market  conditions  were  such  that  a  banker 
were  willing  to  pay  4.84  for  the  first  kind  of  a  bill,  all 
he  would  be  willing  to  pay  for  the  secqnd  might  be 
4.83  or  4.83^. 

It  is  the  prime  bill  of  its  class  which  is  meant  when 

47 


48  FOREIGN  EXCHANGE  EXPLAINED 

it  is  said  that  the  rate  of  exchange  for  any  of  the  types 
of  bills  mentioned  in  the  last  chapter  is  quoted  at  so- 
and-so-much.  If,  for  example,  you  say  that  sixty  days' 
sight  documentary  drafts  on  London  are  quoted  at 
4.84  you  mean  drafts  against  some  staple  commodity, 
drawn  by  a  house  of  high  standing  on  a  house  of  high 
standing  abroad  or  on  a  bank.  Drafts  of  that  character 
drawn  by  less  well-known  firms,  or  against  less  desirable 
forms  of  merchandise,  might  at  the  same  moment  be 
selling  at  considerably  less  than  4.84. 

With  bankers'  bills,  this  element  of  credit  does  not 
exist  —  except  to  a  slight  extent  in  the  case  of  bills 
drawn  at  sixty  and  ninety  days'  sight.  All  bankers' 
cables  and  short  bills  (assuming  of  course  that  they  are 
bankers  of  standing)  sell  at  about  the  same  price.  In 
the  case  of  sixty  and  ninety  days'  sight  bills,  however, 
there  is  apt  to  be  some  slight  difference  in  the  price  of 
bills  drawn  by  various  bankers,  even  when  all  parties 
concerned  are  in  high  standing.  Where  a  banking 
house  here  has  put  out  what  the  discount  market  in 
London  considers  too  large  an  amount  of  "  long " 
bills,  it  has  often  been  the  case  that  the  paper  has  been 
discriminated  against,  at  least  to  the  extent  of  charging 
a  slightly  higher  rate  of  discount.  Where  that  happens 
there  is,  of  course,  quick  reflection  in  the  rate  of  ex- 
change which  will  be  paid  for  paper  of  that  name  as  it 
is  offered  for  sale  in  the  New  York  market.  Not  in- 
frequently, sixty  and  ninety-day  paper  of  some  banking 
house  of  unquestioned  standing  will  be  offered  anywhere 
up  to  a  quarter  cent  per  pound  below  the  prevailing 
market  —  not  because  there  is  any  question  about  the 


PRICE   RELATIONSHIP  49 

paper's  being  good  but  because  there  is  too  much  of 
it  around. 

Generally  speaking,  however,  all  bankers'  bills  sell 
on  about  the  same  basis  —  so  much  so,  indeed,  that, 
when  purchasing  other  bankers'  bills  through  foreign 
exchange  brokers,  the  purchaser  often  stipulates  merely 
that  the  bills  which  are  to  be  sent  in  to  him  are  to  be 
"  prime  paper,"  and  does  not  even  know  who  the  maker 
of  the  paper  is  till  it  comes  in. 

Cables  the  Fundamental  Rate.  —  So  far  as  the  rela- 
tive prices  of  cables,  sight  drafts,  and  long  bills  are  con- 
cerned, these  are  fundamentally  based  on  the  price  of 
cables.  The  first  thing  in  the  morning  the  foreign 
exchange  banker,  say  in  New  York,  receives  a  cable- 
gram from  his  correspondent  in  London  (and  any  other 
important  centres  where  he  has  close  connections) 
telling  him  just  what  the  rate  on  New  York  is  over 
there,  how  discount  rates  are  quoted,  etc.  With  this 
information  in  hand  (it  is  two  o'clock  in  London  when 
it  is  nine  o'clock  here),  the  New  York  banker  is  in  a 
position  to  commence  buying  and  selling.  If  dollar 
cables  in  London  are,  say,  4.87,  it  is  from  that  figure 
that  the  market  for  sterling  in  New  York  will  com- 
mence to  move  up  and  down. 

The  rate  for  cables  having  been  established,  it  is 
easy  enough  to  fix  the  price  of  demand  drafts,  the  latter 
being  cheaper  by  an  amount  corresponding  to  ten  days' 
interest.  When  a  banker  sells  you  a  cable  he  makes 
immediate  payment  out  of  his  balance  abroad.  When, 
however,  he  sells  you  a  sight  draft,  his  balance  abroad 
remains  undisturbed  for  eight  or  nine  or  ten  days, 

E 


So  FOREIGN  EXCHANGE  EXPLAINED 

which  is  the  quickest  time  in  which  the  draft  he  has 
sold  can  be  presented  for  encashment.  Naturally, 
under  the  latter  circumstances,  he  will  charge  you  less 
than  where  he  sells  you  a  cable  and  loses  the  use  of  his 
money  at  once. 

Difference  in  Price  between  "  Short  "  and  "  Long  " 
Exchange.  —  Just  the  same  principle  holds  true  with 
regard  to  the  difference  between  the  price  of  a  sight 
draft  and  the  price  of  a  "  long  "  draft.  You  go  to  a 
banker  here  and  buy  from  him  a  sight  draft  on  London. 
Actual  payment  to  you,  out  of  the  banker's  balance 
abroad,  will  not  be  made  for  about  ten  days.  You  go 
to  a  banker  here  and  buy  from  him  a  draft  on  London 
payable  sixty  days  after  sight.  Actual  payment  in 
that  case  will  not  be  made  for  about  seventy  days, 
during  all  of  which  time  the  banker's  balance  abroad 
remains  undisturbed.  Naturally  the  cost  of  such  a 
draft  in  New  York  will  be  less  than  the  cost  of  a  sight 
draft,  where  payment  abroad  must  be  made  at  the  end 
of  ten  days  or  less. 

As  to  the  difference,  that  is  measured  simply  by  the 
current  rate  of  discount  abroad,  plus  the  slightly  higher 
charges  incurred  in  selling  "  long  "  drafts.  If  the  dis- 
count rate  abroad  goes  up,  it  tends  to  increase  the  dif- 
ference in  price  between  "  sixties  "  and  "  demand." 
A  decline  in  the  discount  rate,  on  the  other  hand,  tends 
to  bring  the  price  of  the  two  together. 

All  Classes  Move  Together  in  a  Fixed  Relationship.  — 
All  classes  of  prime  bills,  it  will  thus  be  seen,  tend  to 
move  up  and  down  together  in  a  fixed  relationship  one 
to  the  other.     Nor  must  the  statement  previously  made 


PRICE   RELATIONSHIP  51 

that  the  cable  rate  is  the  fundamental  rate  be  taken  to 
mean  that  the  cable  rate  is  the  only  one  that  counts  in 
determining  the  price  at  which  the  various  "  usances  " 
shall  sell.  Suppose,  for  example,  that  for  any  given 
reason  the  supply  of  sixty  and  ninety-day  bills  is  suddenly 
increased  and  that  the  price  of  this  class  of  exchange 
begins  to  fall.  Instantly  the  price  of  "  cables  "  and  of 
"  demand  "  will  fall  correspondingly,  the  relationship 
to  the  price  of  long  bills  (called  for  by  the  discount 
rate  prevailing  abroad)  being  constantly  maintained. 
The  rate  for  cables  and  demand  may  influence  the  rate 
for  long  bills,  or  the  rate  for  long  bills  may  influence 
the  rate  for  cables  and  demand,  but  whatever  happens, 
there  will  always  be  maintained  an  exact  relationship 
as  to  price.  Whatever  readjustments  there  may  be 
and  whichever  rate  is  influencing  the  other,  the  dif- 
ference in  price  between  the  various  usances  will  always 
continue  to  be  measured  by  the  rate  of  discount  pre- 
vailing at  the  place  on  which  the  drafts  are  drawn. 

Why  this  must  be  so  will  perhaps  be  most  clearly 
seen  from  consideration  of  what  would  happen  were 
the  rates  for  "  sixties  "  and  "  demand,"  for  example, 
to  get  "  out  of  line."  At  some  given  time,  we  will  say, 
"  demand  "  is  selling  at  4.87,  "  sixties  "  at  4.84.  Sup- 
pose now,  for  purposes  of  illustration  that,  without 
any  change  in  the  discount  rate  abroad,  "  sixties " 
sell  down  to  4.83  without  the  price  of  "  demand  "  being 
affected.  Is  it  not  plain  that  immediately  every  one 
in  the  business  would  rush  in  and  buy  "  sixties  "  for  the 
purpose  of  sending  them  abroad  for  discount  and  then 
selling  demand  drafts   on   the   balance   thus   created? 


52  FOREIGN  EXCHANGE  EXPLAINED 

And  is  it  not  plain  that  if  that  were  to  happen,  the 
general  buying  of  "  sixties  "  would  increase  the  price  oi 
"  sixties  "  and  the  general  selling  of  "  demand  "  would 
decrease  the  price  of  "  demand,"  until  there  was  quickly 
reestablished  a  relationship  between  the  two  at  which  the 
chance  to  make  a  profit  would  have  disappeared?  The 
exchange  market,  it  must  be  borne  in  mind,  is  simply 
full  of  operators  keenly  on  the  alert  for  just  such  op- 
portunities to  make  a  profit.  The  moment  one  rate 
"  gets  out  of  line  "  with  the  others,  affording  the  op- 
portunity to  make  even  ten  or  twenty  points  (one-tenth 
or  one-fifth  of  a  cent  per  pound),  there  are  plenty  of 
people  ready  to  take  advantage  of  it,  which,  as  has 
just  been  shown,  tends  quickly  to  restore  the  two  rates 
to  their  correct  relative  positions.  i 

Credit  Element  in  Commercial  Bills.  —  Too  much 
emphasis  cannot  be  laid  upon  the  fact  that  the  above 
applies  only  to  bankers'  bills.  Commercial  bills,  par- 
ticularly commercial  long  bills,  are  entirely  different. 
There,  as  has  been  pointed  out,  the  element  of  credit 
enters  largely  as  a  price-determining  factor.  Take  the 
case  of  a  bill  drawn  at  sixty  days'  sight  by  an  American 
exporter  of  moderate  means  on  an  importer  abroad 
whose  name  is  not  particularly  well  known  in  this  market. 
A  New  York  banker  buys  the  draft  and  sends  it  over  to 
his  correspondent,  and  it  is  duly  accepted  by  the  drawee. 
So  far  so  good.  But  acceptance  of  a  draft  isn't  pay- 
ment, by  a  long  shot.  For  sixty-three  days  the  question 
as  to  whether  the  draft  will  be  paid  at  maturity  must 
necessarily  remain  an  open  one.  And  during  a  period 
of  sixty-three  days  a  great  many  things  can  happen. 


PRICE   RELATIONSHIP  53 

If  the  drawee  fails  to  pay  the  draft  at  maturity,  the 
holder  can,  of  course,  come  back  on  the  drawer.  Drawee 
and  drawer,  however,  it  must  be  remembered,  are  pre- 
sumably in  the  same  line  of  business,  and  the  develop- 
ment of  the  conditions  which  caused  inability  on  the 
part  of  the  drawee  to  make  good  his  obligations  have 
not  improbably  hit  the  maker  of  the  draft  as  well. 
Then,  if  it  is  a  "  documents  for  payment  "  bill  which  is 
in  question,  the  holder  must  fall  back  on  the  security 
of  the  merchandise  itself  and  realize  on  that.  If  it 
isa"  documents  for  acceptance"  draft,  there  is  nothing 
for  him  to  fall  back  upon. 

Naturally,  under  the  above  circumstances,  a  banker 
will  pay  considerably  more  for  one  bill  than  he  will 
for  another.  And,  by  the  same  token,  a  not  particularly 
well-known  drawer  has  to  do  considerable  shopping 
around  before  he  can  be  sure  that  he  is  getting  the  best 
possible  price  for  the  bills  he  has  to  offer. 


CHAPTER  IX 

THE  FOREIGN  EXCHANGE  MARKET 

The  closing  sentence  of  the  last  chapter  must  suggest 
to  the  thoughtful  reader  that  there  is  a  good  deal  more 
to  the  buying  and  selling  of  exchange  than  simple 
bidding  and  offering  in  an  established  market.  Right 
here,  indeed,  it  is  time  that  we  looked  a  little  into  how  the 
"  market  "  for  bills  of  exchange  is  actually  constituted. 

Years  ago  bills  of  exchange  were  traded  in  on  the  New 
York  Stock  Exchange.  To-day  the  market  is  directly 
between  the  banks  and  bankers.  There  is  no  market 
place  where  the  man  having  a  bill  of  exchange  to  sell 
can  go  and  sell  it  at  a  quoted  rate.  The  "  market  " 
for  his  bill  is  what  the  various  banks  and  banking  houses 
happen  at  the  moment  to  be  paying  for  that  particular 
class  of  paper.  The  only  way  in  which  he  can  find  out 
what  they  are  paying,  is  for  him  to  approach  some  of 
them  and  make  his  offering. 

To  the  seller  of  exchange  the  protection  afforded  by 
this  system  lies  in  the  fact  that  there  are  a  great  many 
foreign  exchange  bankers  all  in  active  competition. 
Before  that  was  the  case,  the  bid  which  the  man  with 
exchange  to  sell  used  to  get  was  generally  well  below 
what  the  banker  could  well  afford  to  pay  him  and  still 
make  money.     Nowadays  the  banker  is  far  less  apt  to 

5* 


THE  FOREIGN  EXCHANGE  MARKET         5$ 

do  business  that  way.  He  knows  very  well  that  the 
substantial  seller  of  exchange  is  not  going  to  jump 
at  the  first  quotation  he  hears  and  that  if  his  offering 
draws  a  bid  of  4.81  from  one  banker  and  a  bid  of  4.83 
from  another  banker,  banker  number  one  is  never 
going  to  receive  another  offering  from  that  particular 
seller.  It  is,  in  other  words,  a  plain  example  of  com- 
petition for  the  business  establishing  a  fair  market. 

The  Foreign  Exchange  Banker.  —  The  New  York 
exchange  market,  then,  consists  of  a  large  number  of 
banks  and  bankers,  all  in  close  touch  with  one  another. 
All  day  long  over  the  network  of  telephones  by  which 
they  are  connected,  and  through  the  foreign  exchange 
brokers  who  circulate  ceaselessly  throughout  the 
"  Street,"  bankers  interested  in  the  exchange  market 
keep  themselves  apprised  of  exactly  what  is  going  on. 
And  remarkable  indeed  is  the  closeness  of  the  contact 
between  the  houses  —  it  is  practically  unheard  of,  except 
during  periods  of  great  excitement,  for  exchange  to  be 
selling  at  one  price  in  one  part  of  the  "  Street  "  and  at 
another  price  in  another  part.  Let  some  important 
bank  start  bidding  for  bills  at  a  certain  price  and  almost 
immediately  all  the  others  of  any  account  will  know 
about  it.  Though  a  good  half  mile  separates  some  of 
the  most  important  foreign  exchange  banks  in  New  York, 
it  is  almost  as  though  their  representatives  met  face  to 
face  and  did  their  bidding  and  offering  openly  in  a 
common  market.  When  conditions  are  anything  like 
normal,  the  rate  of  exchange  rises  and  falls  just  as 
"  evenly  "  as  though  the  trading  were  all  carried  on 
under  one  roof. 


56  FOREIGN  EXCHANGE  EXPLAINED 

The  "  Broker."  —  Mention  has  been  made  of  the 
"  brokers  "  who  execute  orders  for  a  commission  as 
distinguished  from  the  "  bankers  "  who  buy  exchange 
for  their  own  account,  send  it  abroad,  and  draw  their 
own  bills  against  it.  Of  these  "  brokers  "  the  lot  is 
becoming  increasingly  hard.  There  was  a  time  not  so 
many  years  ago  when  the  competition  for  business  among 
the  bankers  was  less  keen,  quotations  were  wider,  and 
the  broker  was  able  to  render  his  client  a  real  service 
and  incidentally  earn  a  substantial  commission  for 
himself.  Nowadays,  however,  with  the  increasingly 
close  contact  between  the  bankers,  it  is  becoming  more 
and  more  difficult  for  the  broker  to  make  anything.  The 
human  element  in  working  through  a  broker  rather 
than  over  a  telephone  wire  makes  his  services  still 
valuable  to  the  banker  in  connection  with  certain  classes 
of  operations,  but  the  big  profits  in  foreign  exchange 
brokerage  are  a  thing  of  the  past.  It  is  just  a  case  of 
another  middleman  being  crowded  out. 

The  "  Dealer."  —  The  above  refers  particularly  to 
the  foreign  exchange  brokers  whose  dealings  are  prin- 
cipally among  the  banks.  There  is,  it  is  true,  another 
class  of  brokers  —  dealers  in  exchange,  they  are  generally 
called  —  who  handle  the  business  of  commercial  firms 
to  better  advantage  than  these  firms  could  handle  it 
themselves,  and  so  occupy  a  position  which  will  never 
be  taken  away  from  them.  A  big  cotton  shipper  who 
year  after  year  draws  thousands  and  thousands  of  pounds 
sterling  on  big  firms  and  banks  abroad,  and  whose 
bills  are  as  well  known  in  the  market  as  are  the  bills 
of  the  bankers  who  buy  them,  hardly  needs  a  broker 


THE  FOREIGN  EXCHANGE  MARKET         57 

to  secure  him  the  best  possible  rate.  With  a  less  well- 
known  shipper,  however,  or  with  a  firm  which  is  only 
an  occasional  drawer  of  exchange,  the  case  is  different. 
Here  a  broker  may  be  of  very  great  service  indeed. 

In  connection  with  this  matter  of  the  market  for 
exchange,  it  is  to  be  noted  that  in  New  York  there  is 
practically  no  "  dealing  "  in  bills,  at  least  in  the  strict 
sense  of  the  word.  Just  as  soon  as  a  bill  is  drawn  it  is 
sent  abroad  either  for  payment  or  acceptance.  It  is 
seldom,  indeed,  that  it  passes  through  more  than  one 
or  two  hands  before  it  goes.  Every  moment's  delay 
in  sending  over  the  bill  for  presentation  to  the  party 
on  whom  it  is  drawn  means  a  loss  of  interest. 

In  the  United  States,  New  York  is,  of  course,  the 
great  market  for  foreign  exchange.  In  the  district 
around  Chicago  there  is  originated  a  substantial  part 
of  all  the  bills  drawn  against  produce  and  these  find 
their  way  largely  into  the  western  banks,  but  when  it 
comes  to  the  disposing  of  their  own  bills  drawn  against 
these  commercial  bills,  it  is  to  New  York  that  the  western 
banks  must  largely  turn.  The  same  thing  is  true  of 
the  very  large  volume  of  commercial  exchange  originated 
by  exports  of  manufactured  goods  from  the  Pennsyl- 
vania district.  Pittsburgh  and  Philadelphia  banks  absorb 
the  greater  part  of  these  bills,  but  find  it  necessary,  to  a 
great  extent,  to  go  into  the  New  York  market  to  sell  the 
bills  which  they  draw  against  them.  And,  so  far  as  rates 
are  concerned,  it  is  in  New  York  that  rates  for  the  entire 
country  are  practically  made.  Southern  and  western 
banks  keep  in  constant  touch  with  New  York,  and,  in  the 
quotations  they  make,  closely  follow  the  lead  of  New  York. 


CHAPTER  X 

RELATIONSHIP    OF    OUR    OWN    TO    THE    FOREIGN    MONEY 
MARKETS 

Before  passing  on  to  the  vitally  important  question 
of  the  influence  of  the  money  markets  on  exchange 
rates,  we  want  to  be  sure  that  we  have  clearly  in  mind 
the  position  of  the  foreign  money  markets  relative  to 
our  own. 

Great  as  is  the  wealth  of  the  United  States,  it  is  a 
fact  that  there  is  far  more  accumulated  banking  capital 
abroad  than  there  is  here.  London's  capacity  for  dis- 
counting accepted  bills  of  exchange,  for  example,  or 
for  making  short  loans,  is  greater  than  our  own.  Rela- 
tively speaking,  this  is  a  new  country,  with  far  greater 
demands  made  by  its  undeveloped  resources  upon  its 
capital  supply  than  is  the  case  with  the  nations  abroad. 
The  level  of  money  rates,  therefore,  logically  rules  lower 
in  Europe  than  it  does  here. 

That  being  the  case,  it  is  entirely  reasonable  that 
in  normal  times  Europe  should  continuously  be  a  lender 
of  money  in  the  American  market.  For  a  substantial 
part  of  the  banking  capital  which  the  great  foreign 
lending  institutions  have  at  all  times  at  their  disposal 
and  for  which  employment  must  be  found,  the  American 
money  market  offers  greater  opportunities  than  can  be 

58 


WORLD   MONEY  MARKETS  59 

found  at  home.  By  "  opportunities "  is  meant  the 
chance  to  lend  the  money  out  for  short  periods  (sixty 
days  to  six  months)  to  responsible  parties  and  on  the 
very  best  of  collateral. 

The  American  Market  a  Chronic  Borrower.  —  The 
relationship  of  the  money  market  here  to  the  great 
money  markets  abroad,  then,  is  that  of  a  chronic  bor- 
rower. Relative  money  rates,  of  course,  strongly  in- 
fluence the  amount  of  our  borrowings,  but  year  in  and 
year  out  they  run  into  very  large  figures  —  often  into 
what  is  the  equivalent  of  many  hundreds  of  millions  of 
dollars.  Even  when  money  rates  here  fall  to  the  level 
of  rates  abroad  these  loans  to  a  great  extent,  as  they  come 
due,  are  not  paid  off  but  are  allowed  to  continue.  The 
idea,  from  the  lender's  viewpoint,  is  that  this  is  a  satis- 
factory market  to  lend  money  in,  a  market  in  which  a 
continuing  loan  will  show  an  entirely  satisfactory  rate 
of  return.  The  borrower  (ourselves),  on  the  other  hand, 
figures  that  it  is  good  business  to  pay  the  foreign  lender 
as  high  a  rate  of  interest  as  would  have  to  be  paid  here, 
or  even  a  little  more,  in  order  to  keep  this  source  of  supply 
constantly  open. 

There  are  times,  of  course,  when  short  money  becomes 
so  plentiful  in  the  New  York  market  that  we  actually 
assume  the  role  of  lenders  and  put  out  money  abroad,  but 
it  is  very  much  of  a  question  whether  operations  of  this 
sort  ever  run  into  very  big  figures.  In  the  first  place  the 
American  banker  as  a  rule  is  not  sufficiently  familiar 
with  foreign  exchange  conditions  to  make  him  feel 
justified  in  attempting  to  take  advantage  of  the  better 
rate  offered  by  some  foreign  market.     In  the  second 


60  FOREIGN  EXCHANGE  EXPLAINED 

place  we  have  not  yet  developed  in  this  country  the 
machinery  necessary  for  the  profitable  lending  of  money 
abroad. 

A  full  description  of  the  mechanism  of  international 
loaning  operations  would  be  out  of  place  here.  (See 
Chapter  13.)  It  may,  however,  be  pointed  out  that 
such  operations  are  carried  on  by  having  the  borrower 
(or  the  bank  which  is  acting  for  the  borrower)  draw 
sixty  or  ninety  days'  drafts  on  the  bank  in  the  foreign 
country  which  is  doing  the  lending.  A  bank  in  New 
York,  for  example,  which  was  borrowing  £10,000  from 
a  bank  in  London  would  draw  "  long  "  drafts  on  the 
London  bank  for  £10,000.  These  drafts  it  would  then 
sell  in  the  exchange  market  in  New  York,  realizing  dol- 
lars on  them. 

Borrowing  and  Lending  Facilities.  —  Now  it  stands 
to  reason  that  such  operations  are  possible  only  where 
the  borrower  can  be  sure  of  being  able  easily  to  convert 
into  his  own  currency  (and  at  a  fair  rate  of  exchange) 
the  long  drafts  he  has  drawn  on  the  party  abroad  who 
is  lending  him  the  money.  Unless  he  can  be  sure  of 
that,  there  is  no  use  in  his  drawing  at  all.  To  a  New 
York  stock  brokerage  house,  for  instance,  the  right  to 
draw  a  ninety  days'  sight  draft  in  sterling  on  some 
London  bank  is  of  use  only  if  the  draft  can  readily  be 
converted  into  dollars  and  at  a  close  market. 

Such  a  draft  drawn  from  the  New  York  end  can,  of 
course,  always  be  easily  disposed  of.  But  how  is  it 
when  it  is  London  and  not  we  which  is  doing  the  bor- 
rowing and  which  must  draw  the  drafts?  Just  there 
is  where  the  necessary  machinery  is  lacking.    London, 


WORLD   MONEY  MARKETS  61 

for  instance,  can't  draw  on  us  in  dollars  at  long  sight, 
at  least  to  any  great  extent.  Why?  In  the  first  place 
because  under  the  Federal  Reserve  Act  the  banks  here 
wouldn't  be  allowed  to  accept  such  drafts,  and  in  the 
second  place  because  even  if  they  were,  there  is  no 
discount  market  here  which  would  absorb  any  very 
considerable  quantity  of  such  bills.  A  discount  market, 
as  has  been  pointed  out,  must  be  existent  at  any  point  on 
which  long  bills  to  any  considerable  amount  are  to  be 
drawn.  Otherwise  there  is  no  guarantee  that  the  bills, 
after  acceptance,  can  be  turned  into  cash  —  which 
means,  of  course,  that  nobody  would  be  willing  to  take 
them  off  the  drawers'  hands. 

Only  those  markets,  in  other  words,  can  be  a  factor 
in  international  loaning  operation  which  have  the  capac- 
ity of  absorbing  a  large  amount  of  time  drafts  drawn 
on  themselves. 

International  Loans  and  "  Free  "  Gold  Markets.  — 
Still  another  point  which  ought  to  be  emphasized  in 
connection  with  this  matter  of  the  lending  of  banking 
capital  among  nations,  is  that  it  is  only  to  countries 
having  free  gold  markets  that  such  loans  can  safely 
be  made.  (Gold,  Chapter  XII.)  It  is  not  that  pay- 
ment of  the  loan  may  be  demanded  in  gold,  but 
that,  unless  gold  can  be  freely  exported  from  a  country, 
there  is  no  height  to  which  the  rate  of  exchange  in  that 
country  cannot  go  —  which,  of  course,  is  likely  to  make 
repayment  of  the  loan  a  ruinously  expensive  operation. 

Take,  for  instance,  the  case  of  the  United  States, 
which  has  by  far  the  freest  gold  market  of  any  country 
in  the  world.     Neither  the  outside  bank  which  lends 


62  FOREIGN  EXCHANGE  EXPLAINED 

pounds  or  francs  or  whatever  the  currency  may  be, 
in  New  York,  nor  the  borrower  in  New  York,  runs  any 
very  great  risk  so  far  as  the  rate  of  exchange  at  the  time 
of  repayment  is  concerned.  The  rate  may  rise  to  a 
point  which  means  that  the  borrower  will  have  paid  a 
stiff  rate  for  the  money,  but  beyond  a  certain  point  (as 
long  as  gold  is  available  for  export)  the  rate  cannot  go. 
When  the  loan  comes  due  the  borrower  will  be  under  the 
necessity  of  making  a  payment  of  so-and-so  many  pounds 
or  francs  in  London  or  in  Paris,  as  the  case  may  be. 
This  debt  can  be  discharged  either  by  sending  over  a 
banker's  draft  or  by  sending  over  as  much  gold  as  is 
the  equivalent  of  the  pounds  or  francs  to  be  paid,  at 
mint  par.  It  is  thus  a  matter  of  cold  figuring  as  between 
sending  drafts  or  sending  gold  —  in  which  of  the  two 
ways  the  obligation  can  be  discharged  at  the  expendi- 
ture of  the  least  number  of  dollars.  In  no  case  can  it 
cost  more  dollars  than  is  represented  by  the  mint  par 
of  the  pounds  or  other  foreign  currency  to  be  paid, 
plus  the  expenses  of  physically  shipping  the  gold.  Should 
the  rate  of  exchange  buyers  are  willing  to  pay  exceed 
that  point,  bankers  will  be  quick  enough  to  ship  gold, 
creating  fresh  balances  abroad  on  which  they  can  draw, 
and  thus  furnishing  the  bills  of  exchange  for  which  there 
is  such  a  demand. 

The  above,  of  course,  presupposes  (as  is  the  case  in 
the  United  States)  that  gold  for  export  can  be  had  at  a 
fixed  price.  Where  that  is  not  so,  the  case  is  entirely 
different,  there  being  hardly  any  height  to  which  the  rate 
cf  exchange  on  countries  where  substantial  debts  are 
owed,   cannot  go.     For  which   reason  lenders  are  ex- 


WORLD    MONEY   MARKETS  63 

tremely  chary  about  putting  out  their  money  in  places 
where  such  conditions  are  likely  to  develop,  and  bor- 
rowers themselves  think  twice  about  putting  themselves 
in  a  position  where  the  noose  may  so  tightly  be  drawn 
about  their  necks. 

Six  per  cent  bid  for  money  in  one  market  while  in 
another  market  near  by  unlimited  supplies  are  offered  at 
4  per  cent  —  that  is  a  phenomenon  which  possibly  the 
above  may  help  to  explain. 


CHAPTER  XI 

THE    INFLUENCE    OF    MONEY    RATES    ON    THE    EXCHANGE 

MARKET 

To  the  fluctuations  of  the  money  market  both  here 
and  abroad  the  exchange  market  is  extremely  sensitive. 
In  determining  the  general  level  of  exchange  rates  the 
merchandise  movement  is  perhaps  more  important,  but 
as  an  influence  producing  sudden  sharp  movements  in 
exchange,  the  factor  of  money  rates  stands  quite  by 
itself. 

How  the  money  market  affects  the  exchange  market 
will  perhaps  be  most  clearly  seen  if  we  consider  certain 
definitely  outlined  conditions.  Let  us,  for  example, 
take  the  four  separate  cases  of  a  rise  in  money  rates  and 
of  a  fall  in  money  rates  at  New  York,  and  of  a  rise  in 
money  rates  and  a  fall  in  money  rates  at  London,  and 
see  what  the  logical  effect  on  the  exchange  market 
will  be. 

A  Rise  in  Money  Rates  at  New  York  has  a  twofold 
effect  on  the  exchange  market.  In  the  first  place  it 
brings  foreign  banking  capital  into  this  market.  In  the 
second  place  it  causes  New  York  bankers  to  draw  down 
the  balances  they  are  carrying  abroad,  for  the  purpose 
of  employing  the  money  here. 

Foreign   banking   capital,   as   explained   in   the   last 

64 


MONEY  RATES  AND   EXCHANGE  65 

chapter,  is  constantly  on  the  alert  for  profitable  loaning 
opportunities.  The  rate  for  sixty-day  money  here  and 
in  London,  we  will  say,  is  3  %.  All  of  a  sudden  the  rate 
in  New  York  begins  to  strengthen,  without  the  rate  in 
London  being  similarly  affected.  Immediately,  bankers 
abroad  begin  to  take  advantage  of  the  opportunity  to 
get  a  better  rate  here  than  at  home,  and  instruct  their 
New  York  banking  correspondents  to  draw  on  them  at 
sixty  days'  sight  and  put  out  the  proceeds. 

The  effect  of  such  operations  is,  naturally,  to  depress 
the  exchange  market.  Every  £10,000  that  London 
lends  here  means  four  £2500  60  days'  sight  bills  brought 
into  existence  and  offered  for  sale  in  the  exchange  market. 
Let  the  volume  of  bills  so  offered  become  considerable, 
and  quickly  enough  reflection  will  be  found  in  a  decline 
in  the  rate  of  exchange  at  which  they  can  be  turned  into 
dollars.  Which,  of  course,  as  explained  in  Chapter 
VIII,  will  have  the  effect  of  putting  down  the  rate  for 
cables,  demand,  and  all  other  classes  of  bankers'  bills. 

The  second  way  in  which  a  rise  in  money  rates  here 
tends  to  drive  down  the  exchange  market  by  causing  a 
recall  of  balances  carried  abroad,  is  almost  too  obvious 
to  require  explanation.  A  better  return  being  offered 
in  New  York,  it  is  plain  enough  that  New  York  bankers 
carrying  excessive  balances  in  London  will  bring  them 
back  for  use  here. 

Whether  that  is  effected  by  drawing  sterling  drafts 
on  the  banks  abroad  where  the  balances  are  kept,  or 
whether  the  transfer  is  made  by  having  the  holders  of 
the  money  in  London  send  it  over  here  in  the  form  of 
dollar  drafts,  makes  no  difference  so  far  as  the  resulting 


66  FOREIGN  EXCHANGE  EXPLAINED 

depression  of  the  rate  of  exchange  is  concerned.  In  the 
one  case  sterling  drafts  will  be  drawn  and  offered  for  sale 
in  the  New  York  market,  tending  to  put  the  rate  on 
London  down.  In  the  other  case,  drafts  drawn  in  dollars 
will  have  to  be  bought  in  London  by  the  London  bankers 
having  the  remittances  to  make  to  this  side,  tending  to 
put  the  rate  on  New  York  up  —  which,  of  course,  look- 
ing at  it  from  this  end,  is  the  same  thing  as  a  decline  in 
the  rate  on  London. 

A  Decline  in  Money  Rates  at  New  York  affects  the 
exchange  market  by  reason  of  the  fact  (i)  that  under 
such  circumstances  American  bankers  are  likely  to  in- 
crease their  balances  abroad,  (2)  that  repayment  on  a 
considerable  scale  is  likely  to  be  made  of  the  foreign 
money  loaned  out  in  this  market. 

When  money  rates  begin  to  fall  in  New  York,  the 
natural  tendency  on  the  part  of  bankers  is  to  increase 
their  balances  at  foreign  points,  with  the  result  that 
exchange  with  which  to  make  the  remittances  comes 
very  much  into  demand  and  rates  rise.  It  must  be 
remembered,  however,  that  in  the  transferring  of  bal- 
ances from  point  to  point  there  are  other  things  which 
must  be  considered  —  for  instance  the  rate  of  exchange 
which  must  be  paid  for  the  bills  with  which  the  remit- 
tances are  to  be  made.  It  would  be  wrong,  therefore, 
to  assume  that  just  as  soon  as  the  money  market  begins 
to  show  a  weakening  tendency  large  amounts  of  money 
are  sent  out  of  the  country.  In  the  long  run  that  is 
what  inevitably  does  happen,  but  very  often  not  until 
after  rates  here  have  ruled  above  rates  prevailing  abroad 
for  some  considerable  time. 


MONEY  RATES  AND   EXCHANGE  67 

A  decline  in  money  rates  here,  in  the  second  place, 
has  the  effect  of  causing  a  good  many  of  the  foreign  short 
loans  running  in  this  market  to  be  paid  off  as  they 
mature  instead  of  being  renewed.  There  are,  as  has 
been  pointed  out,  reasons  why  borrowers  on  this  side 
sometimes  keep  their  foreign  loans  running  even  when 
the  money  rate  here  is  as  low  as  it  is  abroad  or  lower ; 
but  inevitably,  when  those  conditions  prevail,  foreign 
loans  running  in  this  market  do  suffer  substantial  re- 
duction. Whatever  special  reasons  certain  borrowers 
may  have  for  paying  a  higher  rate  to  foreign  lenders 
than  they  would  have  to  pay  here,  most  borrowing 
is  done  on  the  basis  of  getting  the  money  on  the  best 
possible  terms. 

As  the  repayment  of  a  loan  of  foreign  money  means 
that  the  party  who  is  doing  the  paying  must  go  out  and 
secure  a  demand  draft  for  the  necessary  amount  of 
pounds  or  francs  or  whatever  the  currency  may  be,  it 
is  apparent  that  when  any  considerable  amount  of  such 
loans  are  being  paid  off  at  the  same  time,  there  is  set  up 
a  demand  for  exchange  likely  to  exert  a  strong  uplifting 
influence  on  the  rate.  And  such,  indeed,  is  the  case. 
As  an  influence  tending  to  bring  about  the  sharpest 
kind  of  advances  in  the  rate  of  exchange,  nothing  can 
compare  with  a  sudden  fall  in  the  rate  for  money  and 
the  spread  of  a  feeling  that  this  will  be  the  cheapest 
market  in  which  to  borrow.  Borrowers  of  foreign 
money,  under  such  circumstances,  seem  to  become  sud- 
denly possessed  of  the  idea  that  they  have  been  caught 
short  of  the  exchange  market  and  that  they  must "  cover" 
at  any  price. 


68  FOREIGN  EXCHANGE  EXPLAINED 

A  rise  in  money  rates  in  London,  so  far  as  the  ex- 
change market  here  is  concerned,  exerts  very  much  the 
same  effect  as  a  decline  in  money  rates  in  New  York. 
A  higher  rate  of  interest  being  obtainable  abroad, 
balances  carried  with  the  foreign  banks  are  logically 
increased.  The  rate  which  they  can  get  at  home  for 
their  money  being  greater,  in  the  second  place,  foreign 
bankers  demand  that  their  short  loans  to  us  be  paid 
off  as  they  come  due  instead  of  being  renewed. 

This  question  of  the  influence  on  the  exchange  market 
here  of  a  rise  in  money  rates  abroad  is  particularly 
important  when  it  is  considered  that  not  infrequently 
the  money  rate  at  some  foreign  financial  centre  is  arti- 
ficially raised  because  of  the  resulting  effect  upon  the  rate 
of  exchange  on  that  city  at  outside  points.  Take  a 
time,  for  instance,  when,  at  New  York  the  rate  of  ex- 
change on  London  is  so  low  that  New  York  is  trenching 
heavily  on  London's  gold  supply.  A  point  is  finally 
reached  where  the  Bank  of  England  considers  it  neces- 
sary to  take  positive  action.  The  bank  rate  is  arbi- 
trarily raised.  That  carries  the  whole  London  money 
market  to  a  higher  level.  On  the  exchange  market  at 
New  York  the  effect  is  instantaneous ;  rates,  for  the 
reasons  given  above,  being  driven  sharply  upward  — 
away  from  the  point  at  which  gold  can  profitably  be 
imported  from  London.  If  that  isn't  enough,  the  screw 
can  be  given  another  turn. 

A  decline  in  money  rates  in  London  has  the  same 
effect  on  the  exchange  market  in  New  York  as  has  a 
rise  in  money  rates  in  New  York.  American  balances 
in  London,  earning  less  for  their  owners,  are  drawn 


MONEY  RATES  AND   EXCHANGE  69 

down  by  heavy  drafts  against  them  from  the  New  York 
end.  The  loaning  rate  for  money  in  London  being 
lowered,  in  the  second  place,  the  New  York  market 
becomes  a  more  attractive  place  for  the  owners  of 
foreign  banking  capital  in  which  to  lend.  Large  amounts 
are  thus  placed  at  the  disposal  of  New  York.  The  trans- 
fer of  those  funds  being  affected  by  having  New  York 
draw  long  bills  in  sterling  on  the  lending  banks,  and  it 
being  necessary,  in  order  to  turn  these  sterling  drafts 
into  dollars  to  sell  them  in  the  New  York  exchange 
market,  rates,  under  the  weight  of  these  offerings,  are 
likely  to  be  severely  depressed. 


CHAPTER  XII 

GOLD 

On  the  question  as  to  whether  international  balances 
are  settled  in  gold  or  not  there  exists  a  wide  difference 
of  opinion.  By  one  school  of  economists  it  is  held  that 
actual  balances  are  so  settled ;  by  another,  that  the 
creation  of  such  balances  one  way  or  the  other  brings 
about  conditions  in  the  merchandise  markets  which 
result  in  the  balances  being  settled  by  shipments  of 
merchandise.  The  movement  of  gold,  economists  of 
the  latter  class  are  likely  to  claim,  is  nothing  more  than 
a  manifestation  of  money  market  conditions  and  no 
proof  of  which  market  actually  owes  which. 

As  the  reader  will  have  noticed,  it  has  been  the  author's 
aim  to  keep  this  book  free  of  academic  discussion ;  but 
so  important  in  its  practical  application  is  this  theory 
as  to  what  makes  gold  move,  that  it  would  seem  hardly 
right  to  pass  it  over  with  no  attention  whatsoever. 

What  Makes  Gold  Move.  —  The  financial  relations 
between  two  nations,  it  has  always  seemed  to  the  writer, 
are  no  different  than  the  financial  relations  between 
two  individuals  who  do  a  good  deal  of  business  with 
each  other.  Mr.  A,  we  will  say,  sells  Mr.  B  a  hundred 
dollars'  worth  of  goods.  Mr.  B,  however,  has  pre- 
viously given    Mr.   A  a   mortgage    on  his  house,   the 

70 


GOLD  71 

interest  on  which,  now  due,  amounts  to  $100.  So  far 
as  the  necessity  for  any  immediate  payment  is  concerned, 
therefore,  they  are  all  square.  But  now  it  happens  that 
Mr.  B,  who  is  a  lawyer,  does  a  hundred  dollars'  worth 
of  work  for  Mr.  A.  Mr.  A  not  wanting  to  pay  in  cash, 
asks  Mr.  B  to  add  that  amount  to  the  mortgage  — 
in  other  words  to  lend  him  the  money.  Again  no  need 
for  any  money  to  pass.  After  a  while  Mr.  A  renders 
Mr.  B.  a  hundred  dollars'  worth  of  medical  services, 
but  instead  of  asking  for  it  in  cash  arranges  that  the 
previously  contracted  hundred-dollar  debt  be  cancelled. 
And  so  it  goes.  Mr.  A  sells  goods  and  renders  services 
to  Mr.  B  and  Mr.  B  renders  services  and  charges 
interest  to  Mr.  A.  And  as  long  as  the  balance  one  way 
or  the  other  doesn't  get  too  large,  the  one  that  has  money 
owed  to  him  just  charges  the  account  of  the  other  and 
doesn't  demand  settlement  of  the  balance  in  cash. 

Now  as  long  as  the  various  transactions  come  some- 
where near  balancing,  this  can  go  on  indefinitely.  But 
let  a  time  come  when  the  balance  runs  too  heavily  in 
favor,  we  will  say,  of  Mr.  B,  and  Mr.  A  is  likely  to 
receive  a  request  for  some  real  money  with  which  to 
even  up  things.  After  that,  Mr.  B  assures  him,  things 
can  go  on  the  same  as  before. 

Between  two  countries  like  Great  Britain  and  the 
United  States  which  do  business  with  each  other  on  an 
extensive  scale,  the  financial  relationship  is  not  dis- 
similar to  that  prevailing  between  the  Messrs.  A  and 
B  above  referred  to.  England  buys  goods  and  securi- 
ties from  us  and  is  all  the  time  making  us  short-term 
loans.     We,  on  the  other  hand,  buy  goods  and  securities 


72  FOREIGN  EXCHANGE  EXPLAINED 

from  England,  beside  which  England  renders  us  services 
in  the  way  of  carrying  freight  for  us,  insuring  us,  etc. 
We  owe  England  and  England  owes  us,  and  at  any  given 
moment,  could  the  figures  be  set  down,  there  would  be  a 
definite  balance  one  way  or  the  other.  The  figures,  of 
course,  never  have  been  set  down  and  never  possibly 
can  be;  but  that  in  no  way  alters  the  fact  that  the 
balance,  one  way  or  the  other,  is  an  absolute  reality. 

Every  once  in  a  while  it  happens  that  the  balance  — 
not  the  trade  balance,  remember,  but  the  balance  of  all 
these  varied  obligations  —  swings  so  far  one  way  or  the 
other  that  payments  in  actual  money  (gold)  become 
necessary  to  even  things  up.  It  is  not,  of  course,  a  case 
of  England  demanding  that  we  send  gold  or  of  our  de- 
manding that  they  send  gold.  What  happens  is  that, 
as  a  result  of  the  various  obligations  incurred,  the  rate 
of  exchange  between  the  two  countries  goes  to  a  point 
where  gold  becomes  the  cheaper  medium  through  which 
to  make  remittances.  On  all  our  various  money  dealings 
with  London,  we  will  say,  for  example,  the  balance  at 
some  given  time  gets  so  very  much  against  us  that  some 
sort  of  a  cash  settlement  becomes  necessary.  Nobody 
will  ask  us  to  send  any  cash,  but  what  will  happen  will 
be  that  the  rate  of  exchange  on  London  will  go  so  high 
that  any  American  having  remittances  to  make  will 
find  that  he  can  make  them  cheaper  in  the  form  of 
gold  than  in  any  other  way.  Then,  after  a  lot  of 
gold  has  been  sent  out,  the  balance  is  brought  nearer 
to  equalization  and  the  rate  of  exchange  readjusts 
itself  to  a  point  where  remittances  can  again  be  made 
in  the  form  of  bills. 


GOLD  73 

Another  Theory.  —  The  other  theory  —  held  far 
more  strongly,  by  the  way,  among  economists  than 
among  practical  bankers  —  is  that  when  the  balance 
swings  too  far  against  one  country,  exports  of  commodi- 
ties and  securities  from  that  country  are  automatically 
stimulated  to  a  point  where  readjustment  of  the  too 
adverse  balance  is  begun.  And,  undoubtedly,  if  you 
look  at  the  matter  in  its  broadest  economic  sense  and 
over  a  considerable  period  of  time,  there  is  a  tendency 
in  that  direction.  In  the  meantime,  however,  if  gold 
to  the  extent  of  many  millions  of  dollars  has  been  shipped 
out  of  the  country  because  drafts  were  not  available, 
it  is  hard  to  get  away  from  the  conclusion  that  the  reason 
the  gold  went  out  was  because  the  adverse  balance 
drove  the  rate  of  exchange  to  a  point  where  the  gold 
had  to  go  out. 

Eschewing  the  temptation  further  to  continue  the 
controversy  and  getting  down  to  the  practical  side  of 
the  matter,  it  is  to  be  noted  that  in  the  world  there  are 
just  two  gold  markets  which  can  in  any  sense  be  called 
"  free."  Those  two  markets  are  in  England  and  the 
United  States.  It  is  in  London  and  New  York  only 
that  you  can  be  sure  of  buying  gold  at  anything  like  a 
fixed  price  (even  in  London  the  price  of  bar  gold  fluct- 
uates) and  of  being  allowed  to  export  it  where  you 
please. 

The  Market  for  Gold  in  the  United  States.  —  In  the 
United  States  the  price  of  gold  is  absolutely  fixed  and 
nonfluctuating.  You  can  take  as  much  gold  to  any 
United  States  Assay  Office  as  you  please  and  have  it 
coined  at  the  rate  of  $i.oc  for  each  1.67 182  grammes, 


74  FOREIGN  EXCHANGE  EXPLAINED 

.900  fine  (90%  pure  gold).  On  the  other  hand  you  can 
at  any  time  buy  gold  from  the  Government  at  the 
same  price,  plus  only  a  nominal  charge  of  4  cents  per 
$100  to  cover  the  cost  of  refining,  etc.  If,  after  others 
have  purchased  fifty  or  a  hundred  million  dollars  of  bar 
gold  at  some  sub-treasury,  you  come  along  to  that  par- 
ticular sub-treasury  and  try  to  buy  a  large  amount,  you 
may  be  informed  that  the  supply  has  temporarily  been 
exhausted  and  that  unless  you  want  to  wait  until  more 
bars  have  come  in  you  will  have  to  supply  yourself  in 
some  other  city.  But  as  long  as  a  sub-treasury  has  any 
bar  gold  on  hand  it  is  for  sale  —  to  the  first  comer,  at 
$1.00  for  1.50464  grammes,  .1000  fine,  and  with  no 
questions  asked  what  you  expect  to  do  with  it.  It  is 
not  as  it  is  all  over  Continental  Europe,  where  the  buyer 
of  gold  on  a  large  scale  is  apt  to  be  quietly  advised  that 
the  Government  is  not  at  the  moment  looking  on  exports 
of  gold  with  particular  favor. 

The  Market  for  Gold  in  Great  Britain.  —  In  Great 
Britain  the  Government,  too,  coins  all  gold  offered  it, 
at  a  fixed  rate — 3  pounds  17  shillings  ioi  pence  for  each 
ounce  of  gold  .916!  fine.  The  market  for  bar  gold  in 
England  is  not,  however,  as  it  is  in  the  United  States, 
with  the  Government.  The  Bank  of  England,  it  is 
true,  must  buy  all  gold  of  standard  fineness  (.91 6f) 
offered  to  it,  at  775.  gd.  per  ounce.  But  it  is  not  to 
the  Bank  that  the  buyer  of  bar  gold  goes.  The  real 
market  for  that  is  at  the  "  gold  auction,"  held  once  a 
week,  when  the  new  gold  arriving  from  the  mines  is  sold 
to  the  highest  bidder. 

The  price  at  which  the  gold  is  sold  ranges  between 


GOLD  75 

775.  gd.  and  jSd.  per  ounce.  Below  yjs.  gd.  it  can- 
not go  —  at  that  rate  the  Bank  of  England  must  by 
law,  take  all  the  gold  offered.  Nor  can  the  price  rise 
above  j8d.  for  the  very  simple  reason  that  78^.,  in- 
vested in  sovereigns  (even  slightly  worn  sovereigns) 
will  always  produce  at  least  an  ounce  of  gold.  To  put 
it  more  concretely,  you  want  to  buy  an  ounce  (or  many 
ounces)  of  gold,  with  the  expenditure  of  the  least  num- 
ber of  pounds,  shillings,  and  pence  and  you  find  that  in 
the  open  market  you  have  to  pay,  785.  Under  those 
circumstances,  the  amount  of  gold  you  would  get 
by  exchanging  your  bank  notes  for  sovereigns  would 
be  greater  than  if  you  used  your  bank  notes  to  buy  bars 
in  the  open  market.  (The  above  assumes,  naturally, 
that  you  can  exchange  bank  notes  for  gold.  If  you  can't, 
there  is  no  height  to  which  the  price  of  bar  gold  cannot 
rise.) 

There  are,  of  course,  times  when  for  patriotic  or 
other  reasons,  bankers  refrain  from  exporting  or  im- 
porting gold  even  when  it  could  be  done  at  a  profit. 
But,  under  normal  conditions,  at  all  important  centres, 
conditions  are  carefully  watched  with  a  view  to  taking 
advantage  of  such  profit  possibilities.  At  New  York, 
for  example,  any  one  of  half  a  dozen  or  more  large  bank- 
ing institutions  is  constantly  on  the  alert  for  a  chance 
to  make  a  profit  either  by  shipping  gold  out  of  the 
country  or  by  bringing  it  in.  Between  the  whole  lot  of 
them  it  may  very  well  be  the  case  that  these  banks  may 
not  owe  a  franc  or  a  pound  on  the  other  side,  but  if 
they  see  a  profit  in  shipping  gold  and  then  selling  their 
own  drafts  to  some  one  who  has  debts  to  settle,  they 


76  FOREIGN  EXCHANGE  EXPLAINED 

will  be  quick  enough  to  do  so.  Conversely,  a  bank  may 
not  have  a  sou  on  deposit  in  Paris  above  its  normal 
needs,  but  if  it  finds  that  it  can  buy  a  draft  on  Paris  at 
so  low  a  price  that  when  the  draft  has  been  turned  into 
gold  and  the  gold  brought  to  New  York  the  net  proceeds 
in  dollars  will  be  more  than  the  draft  originally  cost, 
the  operation  is  likely  to  be  made. 

Gold  Exports  —  Direct.  —  As  the  figures  on  gold  ex- 
port and  import  transactions  vary  with  each  transaction 
and  are  good  for  about  twenty-four  hours  after  they  are 
made,  no  attempt  will  be  made  here  to  set  down  as  a 
constant  what  is  per  se  a  variable.  To  put  that  into 
business  English,  it  would  be  worse  than  useless  to  put 
into  a  book  of  this  sort  a  lot  of  calculations  which  would 
immediately  become  out  of  date.  What  can  be  done, 
however,  is  to  show  what  factors  enter  into  the  export 
and  import  of  gold,  so  that  the  calculation  can  at  any 
time  be  made  according  to  the  actual  conditions  then 
prevailing. 

Take  the  concrete  case  of  a  shipment  of  gold  bars 
from  New  York  to  London,  where  the  idea  is  that  the 
banker  is  going  to  buy  gold  here,  ship  it  abroad,  have  it 
credited  to  his  account,  and  then  draw  and  sell  sterling 
drafts  on  the  balance  thus  created.  Obviously,  before 
he  goes  into  such  a  transaction,  there  are  certain  things 
the  banker  must  know.  The  price  he  is  going  to  have  to 
pay  for  his  gold  at  the  United  States  Sub-treasury  is 
fixed  and  doesn't  change,  but  the  cost  of  sending  the 
gold  abroad  (freight,  insurance,  etc.)  constantly  does 
change.  That  is  the  first  thing  that  has  to  be  considered. 
Next  there  is  the  question  as  to  the  price  at  which  the 


GOLD  77 

gold  is  to  be  sold  upon  its  arrival  in  London  —  how  many 
pounds  sterling,  in  other  words,  are  going  to  be  credited 
to  the  account.  Thirdly,  there  is  the  question  of  the  loss 
of  interest,  if  any.  Finally,  and  most  important  of  all, 
there  is  the  rate  at  which  the  drafts,  drawn  on  the  bal- 
ance created  by  the  gold  shipped,  can  be  converted  into 
dollars. 

In  figuring  the  possibilities  of  profit  on  a  gold  ship- 
ment, the  banker  goes  about  it  in  the  very  common-sense 
way  first  of  setting  down  what  it  will  cost  him  to  create 
a  balance  of  so-and-so-many  pounds  abroad,  and  then 
figuring  how  much  he  can  realize  by  selling  out  that 
balance.  The  initial  step  is,  naturally,  to  ascertain  the 
cost  of  freight  and  insurance,  and  loss  of  interest,  and 
the  price  at  which  the  gold  can  be  sold  in  London  "  to 
arrive."  Knowing  that,  the  banker  is  in  a  position  to 
tell  at  what  price  (rate  of  exchange)  he  must  sell  his 
drafts  in  order  to  make  the  desired  profit. 

All  factors  bearing  on  a  gold  export  transaction  can 
be  accurately  determined  at  any  given  time  except  loss 
of  interest,  which,  however,  can  be  closely  approxi- 
mated. The  gold  is  shipped,  and  a  draft,  we  will  assume, 
is  drawn  against  it  the  same  day.  That  means  that 
there  is  no  loss  of  interest  to  be  figured  on  this  side, 
the  proceeds  of  the  sale  of  the  draft  being  used  to  pay 
for  the  gold.  But  on  the  other  side  a  loss  of  interest 
must  be  figured,  it  being  a  practical  certainty  that  the 
draft  sold  will  be  presented  and  will  have  to  be  paid 
before  the  proceeds  of  the  gold  are  credited  to  the  ac- 
count. Usually  the  overdraft  thus  created  lasts  any- 
where from  three  to  five  days. 


78  FOREIGN  EXCHANGE  EXPLAINED 

If,  instead  of  a  sight  draft,  a  cable  is  sold  against  gold 
shipped,  it  is  plain  that  the  loss  of  interest  must  be 
reckoned  for  the  full  time  the  gold  is  in  transit.  Such 
additional  loss  of  interest  will,  however,  be  compensated 
for  by  the  higher  rate  of  exchange  which  the  cable  will 
bring. 

How  to  Figure  a  Gold  Export  Transaction.  —  The 
way,  then,  to  figure  the  gold  export  point  at  any  given 
time  is  (i)  to  find  the  cost  of  the  gold  (plus  the  Assay 
Office  charge),  (2)  to  add  thereto  the  charges  for  packing, 
carting,    freight   and   insurance,  and   loss   of   interest, 

(3)  to  figure  how  many  pounds  sterling  in  London  that 
amount  of  bar  gold  will  produce  at  the  current  rate, 

(4)  to  find  the  rate  of  exchange  at  which  the  new  bal- 
ance must  be  sold  to  produce  as  many  dollars  (plus  the 
desired  profit)  as  were  originally  expended  in  New  York. 

Where  gold  coin  instead  of  gold  bars  is  being  exported, 
the  procedure  is  the  same  except  that  the  cost  of  the 
gold  in  New  York  will  not  be  figured  at  so-and-so-much 
per  ounce  but  at  $10  per  eagle  or  $20  per  double  eagle. 
Here  is  where  the  item  of  "  abrasion  "  comes  in.  If 
new  coin  can  be  secured,  it  is  very  nearly  as  satisfactory 
to  ship  as  bars.  But  in  the  case  of  gold  which  has  been 
in  circulation  and  is  not  full  weight,  a  higher  rate  will 
have  to  be  secured  for  the  drafts  drawn  against  the 
shipment  than  in  the  case  of  bars.  Coin,  it  must  be 
remembered,  whether  it  is  new  or  old,  is  bought  on  this 
side  at  face  value,  and  credited  on  the  other  side  accord- 
ing to  weight.  Consequently,  if  the  coins  have  been  in 
circulation  for  some  time  and  have  lost  something  of 
their  weight,  the  shipper  on  this  side  is  paying  for  some- 


GOLD 


79 


thing  he  doesn't  get.  The  only  way  he  can  get  it  back 
is  by  obtaining  a  higher  rate  of  exchange  on  the  drafts 
he  sells  against  the  gold. 

Gold  Imports  —  Direct.  —  It  might  seem  at  first 
thought  as  though  the  figuring  of  gold  imports  were 
merely  the  reverse  of  figuring  gold  exports,  but  such  is 
not  the  case.  When  we  ship  gold  to  London  we  draw 
drafts  on  the  balances  thus  created.  When  London 
ships  gold  to  us,  London  does  not  draw  on  us,  but  makes 
us  send  over  sterling  drafts  in  payment.  The  result  is 
that  the  item  of  interest  has  to  be  figured  differently. 

The  successive  steps  of  a  gold  import  transaction,  for 
instance  between  New  York  and  London,  begin  with  the 
purchase  of  the  metal  abroad,  at  whatever  the  open 
market  price  may  be.  To  this  debit  of  the  New  York 
importing  bank's  London  account,  there  must  then  be 
added  the  cost  of  freight,  insurance,  loss  of  interest 
(explained  below) ,  and  sometimes  a  commission  for  buy- 
ing the  gold.  In  order  to  come  out  of  the  transaction 
even,  the  New  York  banker  must  be  able,  out  of  the 
proceeds  of  the  gold  when  it  arrives  in  New  York,  to 
purchase  and  send  over  sufficient  exchange  on  London 
to  cancel  the  debit  to  his  account.  Anything  left  over 
is  his  profit. 

Where  payment  for  the  gold  is  made  by  the  American 
banker  with  a  cable  on  London,  the  loss  of  interest  must 
be  figured  for  the  whole  time  the  gold  is  in  transit  at  the 
rate  at  which  the  money  could  have  been  used  in  New 
York.  Immediate  payment  for  the  gold  being  made 
in  London,  there  is  no  charge  for  interest  there.  But  in 
New  York  there  is  a  charge.     The  cable  has  to  be  paid 


80  FOREIGN  EXCHANGE  EXPLAINED 

for  at  once,  whereas  the  gold  does  not  arrive  for  a  week 
or  ten  days.  In  the  meantime  the  New  York  banker 
is  out  of  the  use  of  his  money.  He  must,  therefore, 
charge  up  to  the  transaction  a  week  or  ten  days'  interest 
at  the  prevailing  rate  for  money. 

Where  the  New  York  importing  bank  pays  for  the 
gold  in  London  by  sending  over  a  sight  draft  instead  of 
a  cable  transfer,  interest  must  be  figured  on  both  ends. 
Ship  the  gold,  wires  the  New  York  bank,  and  we  will 
send  over  a  bankers'  draft  in  payment.  All  very  well, 
but  the  gold  has  got  to  be  paid  for  at  once  —  which  means 
that  the  London  bank  is  going  to  be  out  of  the  use  of  its 
money  all  the  time  that  the  reimbursing  draft  is  on  its 
way  over.  There  is  the  first  item  for  interest  to  be  taken 
care  of.  Then,  in  addition,  the  New  York  banker  is 
going  to  be  out  of  the  use  of  the  money  he  paid  for  the 
sterling  draft,  for  the  whole  time  the  gold  is  on  its  way. 
He  has  to  pay  for  the  draft  the  day  the  gold  starts  from 
London.  He  doesn't  get  his  money  back  until  the  gold 
arrives  on  this  side.  About  twenty  days  —  that  is 
what  the  interest  amounts  to  on  a  gold  import  transac- 
tion where  payment  for  the  gold  is  made  with  a  sight 
draft. 

Where  coin  instead  of  bars  is  being  imported,  purchase 
of  the  gold  abroad,  it  must  be  borne  in  mind,  is  made 
at  face  value ;  but  the  gold,  when  it  arrives,  is  credited  by 
weight.  An  American  bank,  for  example,  importing 
sovereigns  from  England  or  napoleons  from  France 
has  to  pay  twenty  shillings  for  each  sovereign  and 
twenty  francs  for  each  napoleon  whether  the  coin  is 
new  and  of  full  weight  or  whether  it  is  old  and  "  light." 


GOLD  8 1 

Upon  its  arrival  here,  however,  the  coins  are  credited  by- 
weight  —  merely  as  so-and-so-much  gold  metal.  If 
they  are  "  light,"  it  means  that  the  importer  has  paid 
for  a  certain  amount  of  gold  he  didn't  get.  The  rate 
of  exchange  he  can  afford  to  pay  for  the  pounds  or  francs, 
therefore,  with  which  he  is  purchasing  the  worn  foreign 
coin  must  be  lower  than  if  he  were  importing  new  coin 
or  bars. 

Indirect  Gold  Shipments.  —  Beside  the  "  direct  " 
gold  exports  and  imports  described  above,  there  is  still 
another  kind  of  gold  movement  which,  for  lack  of  a  better 
term,  may  be  styled  "  indirect."  Reference  is  made 
to  the  kind  of  operation  which  takes  place,  for  instance, 
when  New  York  ships  gold  to  Paris,  has  the  resulting 
balance  transferred  from  Paris  to  London,  and  then  draws 
and  sells  drafts  on  London.  Another  kind  of  indirect 
operation  is  where  some  market  like  London,  for  ex- 
ample, owing  large  amounts  in  South  America  and  hap- 
pening to  have  large  balances  in  New  York,  arranges 
to  have  payment  made  direct  from  New  York  in  the 
form  of  gold. 

The  above  must  suggest  that  the  form  and  variety  of 
these  "  indirect  "  operations  in  gold  are  almost  un- 
limited. New  York  may  send  gold  to  Japan  at  the 
solicitation  of  London,  or  London  may  send  gold  to 
South  America  at  the  solicitation  of  Paris  —  any  market, 
in  fact,  may  send  gold  anywhere  because  directed  to 
do  so  by  some  other  market.  It  is  all  a  cold  matter  of 
rates  of  exchange  and  of  the  cheapest  way  of  making 
the  remittance.  Some  London  bank,  we  will  say,  has 
to  make  a  remittance  to  Buenos  Aires.     The  rate  in 

G 


82  FOREIGN  EXCHANGE  EXPLAINED 

London  for  drafts  on  Buenos  Aires  being  high,  the 
manager  sits  down  with  his  pad  and  pencil  and  starts 
figuring  whether  he  cannot  discharge  his  obligation  to 
South  America  more  cheaply  by  directing  his  New  York 
correspondent  to  ship  the  gold  direct.  If  the  London 
bank's  balance  with  its  New  York  correspondent  is  not 
sufficient,  the  New  York  bank  can  be  advised  to  draw 
on  London  in  order  to  raise  the  money  with  which  to 
buy  the  gold. 

If  it  appears,  in  the  case  above,  that  the  London 
bank's  South  American  obligation  can  be  discharged 
at  an  expenditure  of  less  pounds  sterling  by  having  the 
gold  sent  from  New  York,  the  chances  are  that  it  will 
be  done  that  way.  And  so  it  is  with  all  these  indirect 
gold  transactions.  Each  time  it  is  simply  a  case  of  taking 
all  the  appertaining  conditions  and  exchange  rates  into 
account,  and  then  figuring  out  in  which  way  it  can  best 
be  done. 

Obstructing  Gold  Movements.  —  With  regard  to  the 
above,  however,  it  must  always  be  borne  in  mind  that 
no  market  likes  to  lose  gold,  and  that  when  an  outflow 
reaches  substantial  proportions,  steps  are  likely  to  be 
taken  to  exert  a  check  upon  it.  Such  measures  may 
take  the  form  of  arbitrary  restrictions  on  withdrawing 
gold  for  export  or,  on  the  other  hand,  may  take  the 
much  subtler  form  of  money  market  manipulation. 
When,  for  example,  the  rate  of  exchange  on  London 
gets  down  to  a  point  where  more  gold  is  being  taken 
from  London  than  bankers  there  want  to  see  go,  the 
chances  are  that  the  Bank  of  England's  minimum  dis- 
count rate  will  be  advanced.     The  effect  of  that  is  to 


GOLD  83 

raise  the  whole  level  of  money  rates  in  London,  which, 
as  is  explained  in  Chapter  XI,  will  immediately  begin 
to  exert  an  important  uplifting  influence,  at  outside 
points,  on  the  rate  of  exchange  on  London.  And,  of 
course,  as  the  rate  of  exchange  on  London  begins  to  go 
up,  it  becomes  increasingly  difficult  for  the  outside 
markets  to  take  London's  gold.    Quod  erat  faciendum.  ^ 


CHAPTER  XIII 

bankers'  long  bills 

To  a  far  greater  extent  than  is  generally  appreciated, 
long  bills  of  exchange  (bills  payable  in  from  60  to  90 
days)  enter  into  foreign  exchange  transactions.  We 
saw  in  Chapter  VII  how  exporters  of  merchandise  draw 
long  bills,  with  documents  attached,  on  the  parties  to 
whom  the  goods  are  shipped  or  on  banks  designated  by 
them.  We  have  now  to  consider  the  long  bill  drawn 
by  the  banker  in  one  country  on  the  banker  in  another 
country,  and  the  extremely  important  part  it  plays. 

At  the  very  outset  it  must  be  clearly  understood  that 
the  only  thing  that  makes  the  long  bill  possible  is  the 
credit  of  the  drawer,  the  credit  of  the  drawee,  and  the 
general  belief  (founded,  of  course,  on  experience)  that 
the  bill  will  be  paid  at  maturity.  Never  mind  how  good 
a  long  bill  may  actually  be,  unless,  on  the  part  of  those 
institutions  which  make  a  practice  of  discounting  bills 
and  which  constitute  the  "  discount  market,"  there 
exists  a  belief  that  the  bill  is  good,  such  a  bill  cannot 
possibly  be  issued  and  sold.  A  long  bill  is  what  it  is  and 
is  used  as  it  is  only  because  it  can  at  any  moment  be 
turned  into  money  by  discounting  it. 

It  stands  to  reason,  therefore,  that  for  a  bankers' 
long  bill  to  be  worthy  of  the  name,  it  must  be  drawn  by 

84 


( iunranly  Trusl  Company  oi  New  York 

\.$'c0£?~/-  NkuYori;  ^-r^  cfe       ig/6 

<$7C£y         iiavsahm.-^^/    OFTHJs  I'll.'STdiKx,  iun,,i."ii.,...m,  I  vmaIim 

Sijty/l/'  /fierce ja^«zC  fitx^m^Cp  •— ;     "x--  ste»m*.-& 

VaI.i  K    Kl-:i   BIVBn  Ullllll  I   II  AIM  .1:   toiiii:    \r  .  1  il  ST  OF 

(iiMr.iliMii|..l<<iin|„m\„iV«Vrii 

ra  Guaranty  Trusl  Compam'ofNc\v\ork  * 

MI ,'.- —  .-.«^# 

X'.'A12183  London  ,., ,fe^ 


A 


S*** 


• 


Guaranty  Trusl  Company  of  Now  York 

).&'&&<=!  "/-  NkwYork  7//tZ.C£*f.   So         l<\/6 

£?t-Xty        DAVB-VKTUU  S^O^t/-  oi.-inisSi:i'nN'l)ni-Kx<:iivM,i:il'insT  1  sruin 
l'AVT<.nn:,i,,.„:.,<„    ^fc3Z^«  i?^i^V,^iriS^«<V   <S     -- 


■  Guaranty  Trirsl  <  kmpanyofXcw'^brk 

'.  • « J • 


r& 


\'.'  A12183  !.<«...« 


Bankers'  Long  Bill  —  Original  and  Duplicate 


BANKERS'  LONG  BILLS  85 

a  banker  of  unquestioned  standing  on  a  banker  of  un- 
questioned standing  resident  at  some  point  where  a 
broad  discount  market  exists.  That  is  the  kind  of  bill 
that  is  meant  when  we  read  that  "  bankers'  long  bills  " 
are  quoted  at  such  and  such  a  price  —  the  only  kind  of 
bankers'  long  bill,  in  fact,  that  is  traded  in  in  the  ex- 
change markets. 

Pledging  Credit.  —  When  a  banker  in  one  country 
draws  a  long  bill  on  a  banker  in  another  country,  it  is 
to  be  observed,  the  banker  who  is  drawn  on  does  not 
put  up  any  money.  What  he  does  is  to  "  accept  "  the 
bill  and  give  it  a  due  date.  "  Accepting  "  the  bill,  of 
course,  binds  him  legally  to  pay  it  at  maturity ;  but, 
as  we  shall  see,  pretty  nearly  all  the  operations  in  which 
banker's  long  bills  are  involved  are  worked  with  the 
idea  that  the  banker  who  was  drawn  on  shall  be  put  in 
funds  with  which  to  meet  the  drafts  he  has  accepted, 
before  those  drafts  come  due  and  have  actually  to  be 
paid  by  him.  The  banker  who  "  accepts  "  a  long  bill 
drawn  on  him  from  another  country  does  not,  in  other 
words,  except  in  the  rarest  instances,  expect  himself  to 
have  to  find  the  money  with  which  to  pay  the  draft. 
Before  the  draft  comes  due,  funds,  he  knows,  will  have 
been  sent  him  by  the  drawer.  The  accepting  banker 
does  not  put  up  any  cash.  What  is  being  pledged  — 
put  in  such  a  form,  if  you  will,  that  it  can  be  turned  into 
money  —  is  his  credit. 

Now  it  stands  to  reason  that  no  banker  will  thus 
pledge  his  credit  unless  he  is  entirely  satisfied  as  to  the 
standing  of  the  party  who  is  drawing  on  him  and  of  the 
certainty  that  the  drawer  will  send  him  the  cash  to  meet 


86  FOREIGN  EXCHANGE  EXPLAINED 

the  bill  with,  before  the  bill  comes  due.  The  bill  having 
been  accepted  has  got  to  be  paid  on  the  dot,  at  maturity. 
If  the  money  to  pay  it  with  has  failed  to  reach  the  ac- 
cepting banker,  he  has  got  to  pay  it  himself.  A  moment's 
hesitation  in  taking  care  of  the  accepted  draft  when  it 
comes  due,  he  very  well  knows,  would  instantly  end  his 
career  as  a  banker. 

A  Privilege  Seldom  Abused.  —  The  drawing  of  long 
bills  by  a  banker  in  one  country  on  a  banker  in  another 
country  is  thus,  like  the  holy  state  of  matrimony,  some- 
thing which  is  not  lightly  to  be  entered  into.  If  the 
discount  market  in  London,  for  example,  annually  ab- 
sorbs untold  millions  of  pounds  sterling  of  such  drafts 
as  it  does,  it  is  only  because  experience  has  shown  that 
bankers  don't  abuse  the  confidence  reposed  in  them. 
Once  in  a  while  it  happens  that  a  couple  of  banking 
houses  whose  long  paper  has  always  been  well  thought 
of  take  advantage  of  the  fact  and  utilize  their  credit 
for  illegitimate  purposes  and  with  consequences  dis- 
astrous, but  such  cases  are  few  and  far  between.  Not 
infrequently,  perhaps,  the  funds  raised  by  the  sale  of 
bankers'  long  bills  are  used  for  purposes  of  which  those 
who  have  discounted  the  bills,  did  they  but  know  of 
them,  would  not  strictly  approve.  The  being  able  to 
raise  money  merely  by  drawing  long  drafts  on  a  foreign 
correspondent  is,  however,  such  a  remarkable  privilege, 
that  it  is  jealously  guarded  and  seldom  abused. 

Where  Does  the  Money  Come  From?  —  Right  at 
this  point,  and  before  we  get  into  the  discussion  of  the 
various  purposes  for  which  bankers'  long  bills  are  drawn, 
we  want  to  be  sure  that  we  understand  where  the  money 


BANKERS'  LONG  BILLS  87 

comes  from  when  A  in  New  York  puts  himself  in  posses- 
sion of  approximately  $100,000  for  60  days,  by  drawing 
a  £20,000  sixty-days'  sight  draft  on  B  in  London.  Where 
does  the  money  come  from  ?  —  from  the  party  in  New 
York  to  whom  A  sells  the  £20,000  draft  he  has  drawn  — 
that  is  the  natural  answer  and  true  as  far  as  it  goes. 
The  trouble  is  it  doesn't  go  far  enough.  A,  to  be  sure, 
gets  his  dollars  from  the  party  in  New  York  to  whom  he 
sells  the  £20,000  draft ;  but  the  only  reason  that  party 
is  willing  to  pay  A  cash  for  the  draft  is  because  he  (the 
party  who  buys  the  draft  from  A  in  New  York)  knows 
that  he  can  have  the  draft  discounted  in  London  and 
thus  get  his  money  back  any  time  he  wants  it.  The 
money  that  A  gets  in  New  York  thus  really  comes  from 
the  discount  market  in  London  and  is  transferred  to  him 
through  the  instrumentality  of  the  party  in  New  York 
to  whom  he  sells  the  draft  he  has  drawn  on  B  in  London. 
The  discount  market  in  London,  it  will  thus  be  seen, 
has  a  big  effect  on  A's  willingness  to  utilize  his  privilege 
of  drawing  on  B.  If  the  discount  market  is  away  up 
in  the  air,  it  means  that  off  the  face  of  any  draft  A  draws, 
there  will  have  to  come  a  considerable  amount  of  dis- 
count before  the  draft  can  be  turned  into  cash.  When, 
therefore,  A  comes  to  draw  his  draft  and  offer  it  for  sale, 
he  finds  that  only  a  very  low  rate  of  exchange  is  bid  him 
for  it,  a  rate  so  low,  that,  very  probably,  he  decides  to 
defer  his  drawing  to  a  more  favorable  time. 


CHAPTER  XIII 

{Continued) 

bankers'  long  bills 

Bankers'  long  bills  may  be  divided  as  follows : 

Purpose  for  which  drawn 

I.    Bills  drawn  in 
the   regular 


Bankers'  Long 
Bills. 


course       of 
business. 

II.   Loan  Bills. 


Against  remittances  of 
nondiscountable  com- 
mercial bills. 

Against  "Futures." 


III.   Finance  Bills. 


i.   Loaning  foreign  money 
here. 

i.    Financing  the  purchase 
of  securities. 

2.  In     anticipation     of     a 

decline    in     exchange 
rates. 

3.  Regular  working    Capi- 

tal. 


Bills  Drawn  Against  Nondiscountable  Commercial 
Bills.  —  In  the  regular  course  of  his  business,  as  we 
have  seen,  the  exchange  banker  buys  pretty  much  any 
kind  of  a  bill  offered  him,  provided  he  considers  it  safe, 
and  provided  that  he  can  get  it  at  a  price  which  will 
allow  him  to  draw  his  own  bill  against  it  at  a  profit. 
Some  of  the  bills  he  buys  are  drawn  at  sight  and  will  be 


BANKERS'  LONG  BILLS  89 

credited  to  his  account  as  soon  as  they  get  over  to  the 
other  side ;  against  those  he  can,  of  course  draw  his 
own  sight  bills.  Some  of  the  bills  he  buys  are  long 
"discoun tables  "  ;  those,  too,  can  be  turned  into  money 
as  soon  as  they  get  over,  and  be  drawn  against  at  once. 
But  others  of  the  bills  he  buys  are  "  payments  "  (Chap- 
ter VII),  long  bills  which  may  or  may  not  be  taken  up 
under  rebate  before  maturity  and  so  turned  into  money. 
Against  such  a  bill  it  is  palpably  impossible  for  the 
banker  to  draw  his  own  bill  payable  on  demand.  There  is 
no  certainty  that  the  drawee  will  take  up  the  bill  before 
he  has  to,  at  maturity.  Very  possibly  the  full  sixty- three 
days  will  go  by  before  the  deposit  account  of  the  banker 
who  sent  the  bill  over  will  be  credited  with  the  proceeds. 

Now  the  profit  in  the  business  does  not,  of  course, 
warrant  the  banker's  money  being  tied  up  for  any  such 
length  of  time  —  he  must  draw  against  the  bills  he  is 
remitting.  He  cannot  draw  drafts  payable  on  demand, 
but  he  can  draw  drafts  (and  sell  them  at  once  for  cash) 
which  will  not  have  to  be  paid  out  of  his  account  abroad 
until  the  commercial  bills  against  which  they  are  drawn 
come  due.  Against  a  batch  of  £10,000  of  sixty-day 
"  nondiscountables,"  for  example,  he  can  sell  his  own 
sixty  days'  sight  bill  for  £10,000.  His  correspondent 
bank  abroad,  it  is  true,  will  have  to  "  accept  "  the  draft ; 
but  with  the  "  accepted  "  commercial  bills  in  its  own 
hands,  the  correspondent  will  be  quite  willing  to  do  that. 

It  may  be,  and  indeed  it  is  very  often  the  case,  that 
through  previous  experience  the  banker  here  knows 
that  John  Smith  and  Co.'s  sixty-day  commercial  bills 
are  never  allowed  to  run  to  maturity,  but  are  always 


go  FOREIGN  EXCHANGE  EXPLAINED 

taken  up  at  the  end  of  thirty  days.  That  being  so,  the 
banker  is  reasonably  safe  in  drawing  his  own  thirty- 
day  bills  against  such  a  remittance.  There  is  always 
the  chance  that  John  Smith  and  Co.  may  break  away 
from  their  regular  custom  and  not  take  up  the  bills  under 
rebate  ahead  of  time  as  expected,  but  even  if  that  does 
happen,  the  banker  can  cover  the  "  thirties  "  he  has  pre- 
viously drawn,  in  some  other  way.  The  balance  of  a 
banker  doing  this  sort  of  business,  anyhow,  is  apt  to  run 
to  proportions  which  would  easily  take  care  of  the  ma- 
turing "  thirties  "  without  any  immediate  remittance 
from  this  side  being  made. 

Bills  Drawn  Against  Futures.  —  That  is  one  way 
in  which  bankers'  long  bills  are  brought  into  existence 
during  the  regular  course  of  business.  Another  is 
through  purchases  of  "  futures."  Some  large  exporter, 
we  will  say,  knows  that  in  two  or  three  months  he  will 
be  making  heavy  shipments  and  will  have  a  large  amount 
of  demand  exchange  to  sell.  Not  wanting  to  take  a 
chance  on  what  the  exchange  rate  then  may  be,  he  goes 
to  a  banker  and  offers  to  sell  him  a  "  future  "  —  £5000 
of  his  sight  bills,  say,  deliverable  to  the  banker  here  in 
New  York  in  three  months.  The  banker  knows  what 
the  immediate  market  is  for  his  own  bills,  payable  in 
three  months,  and  bases  the  bid  he  makes  for  the 
"  futures  "  accordingly.  If  the  merchant  accepts  and 
signs  the  contract  to  deliver  the  bills  at  the  specified 
time,  the  banker  goes  ahead  and  draws  his  own  ninety- 
day  bills,  secure  in  the  knowledge  that  cover  for  them 
(at  a  fixed  and  definite  rate  which  shows  him  the  profit 
he  wants)  has  been  provided. 


CHAPTER  XIII 

{Continued) 

bankers'  long  bills 

Loan  Bills.  —  Loan  Bills  come  into  existence  as  a 
result  of  the  short-term  loans  of  pounds  and  francs  and 
other  currencies  continually  being  made  in  this  market. 
When  Europe  lends  here  the  method  of  transferring  the 
funds  to  this  side  is  not,  as  is  generally  supposed, 
to  send  over  the  actual  gold  or  to  remit  dollar  exchange 
to  the  borrower.  What  actually  happens  in  the  vast 
majority  of  cases  is  that  the  American  correspondent 
of  the  foreign  bank  which  is  going  to  do  the  lending 
draws  sixty  or  ninety-day  sterling  drafts  on  London 
and  then  turns  over  the  drafts  themselves  (or  the  dol- 
lar proceeds  of  the  draft)  to  the  borrower.  The  borrower 
then  has  the  use  of  the  money  for  sixty  or  ninety 
days  as  the  case  may  be,  at  the  end  of  which  time 
he  must  see  to  it  that  the  lender  (the  bank  abroad 
which  was  drawn  on)  is  provided  with  funds  with  which 
to  pay  the  long  drafts  it  has  previously  accepted.  (No 
actual  money,  it  is  to  be  noted,  is  put  up  by  the  lender. 
What  happens  is  that,  in  the  manner  described  earlier 
in  this  chapter,  the  lender  pledges  his  credit  and  puts 
the  borrower  in  America  in  touch  with  the  great  reser- 
voir of  loanable  bank  capital  in  London.) 

91 


92  FOREIGN  EXCHANGE  EXPLAINED 

To  take  an  actual  illustration,  a  bank  in  London 
decides  to  lend  out  £50,000  in  the  New  York  market 
for  three  months  and  asks  its  New  York  correspondent 
to  make  the  necessary  arrangements.  The  New  York 
bank,  probably  through  a  money-broker,  finds,  say,  a 
bond  house,  which  is  willing  to  borrow  the  £50,000, 
depositing  as  collateral  good  bonds  having  a  market 
value  of  $300,000.  The  terms  of  the  loan  are  that 
the  borrower  is  to  pay  a  commission  of  i  of  one  per 
cent  on  the  £50,000  of  ninety-day  sterling  bills  turned 
over  to  him,  and  that  at  the  end  of  ninety  days  he 
is  to  provide  the  New  York  banking  correspondent  of 
the  London  bank  with  a  bankers'  sight  draft  on  London 
for  £50,000. 

These  arrangements  having  been  made,  and  the 
$300,000  of  bonds  having  been  deposited,  the  New 
York  banker  goes  ahead  and  draws  £50,000  of  ninety 
days'  sight  sterling  bills  and  turns  them  over  to  the  bond 
house.  The  bond  house  takes  the  bills  and  sells  them 
in  the  exchange  market  at  New  York  at  whatever  is 
the  rate  prevailing  for  bankers'  long  paper.  It  thus 
finds  itself  possessed  of,  roughly,  a  quarter  of  a  million 
dollars,  the  use  of  which  it  is  to  have  for  ninety  days. 

Observe  carefully  that  the  borrower  receives,  not 
dollars,  but  sterling  drafts  on  London  drawn  at  ninety 
day's  sight  which,  to  be  turned  into  dollars,  must  be  sold 
at  the  ninety-day  rate.  Now  the  ninety-day  rate,  as 
we  have  seen,  is  lower  than  the  sight  rate  by  the  price 
of  discount  prevailing  abroad.  The  borrower,  in  other 
words,  borrows  pounds  which  he  must  convert  into 
dollars  at  the  ninety-day  rate,  whereas,  when  he  comes 


(jiianuilvTmsl  (ompaiivof'XowYork    , 


.///,/  ,'C     '■''£        ,,<    '/■<'<<•(''!-       >     <_<■>        • 

//     /V/v  .'     '    ,    /'///'/ //ft///,     //////j     rf,//r 
////'///-  ,/„/.,/,   /,■    J/,,//,,/,,,,,//,,/ 

QuarafttyTfust Company  of  NewYo«k; 
._  33iombard  Street.  ,         ,  per  pro 

w-  London. 


'//'<//,»/ 


"m 


Guaranty  Tmsl  Com panyol'Xow York 

f,-    //,/,,        '  '  '  ''/  /////////      /.<./////     ,,;//<>//'/         //"       /////'    //• 
,^X5     //ZlT3<Ji  £t*t„£t:.     -£><j5^<fc<6'4>        -       ~  :-         —,//ff///i/l 

„/,„/,  ,/,„„/,   /,   'Ms,  //',/,■  mr»K&        fc 

f  '  PER  PRO  ^  j 

Gu;ir-.uityTrust(:nii.1.;iii>  ofNeWYork,  • 

33  Lomt?a«i  Street. ,  ,  pgr  pro  A 

•'  London. 


Bankers'  Check  —  Original  and  Duplicate 


BANKERS'  LONG  BILLS  93 

to  pay  those  pounds  back  ninety  days  later,  he  must 
provide  a  sight  draft  for  which  he  will  have  to  pay 
the  sight  rate. 

The  difference  in  the  rate,  plus  the  commission,  is 
what  the  borrower  actually  pays  for  his  money.  He 
sold  the  long  drafts  turned  over  to  him  at  perhaps  4.83, 
the  rate  for  sight  drafts  being  then  4.87.  Ninety  days 
pass  and  it  becomes  necessary  to  pay  off  the  loan.  Ex- 
change rates,  he  finds,  are  just  where  they  were  —  4.83 
for  ninety-day  bills,  4.87  for  demand.  This  time,  how- 
ever, it  is  only  the  rate  for  demand  which  interests  him  — 
it  is  a  demand  draft  which  he  must  return.  So  he  buys 
the  pounds  he  wants  at  4.87.  He  has  paid  in  addition 
to  the  commission,  exactly  4  cents  per  pound  sterling 
for  the  use  of  the  money  for  the  ninety  days. 

The  "  Risk  of  Exchange."  —  In  the  cost  of  such  a 
loan  to  the  borrower,  therefore,  there  is  a  variable  factor 
—  the  rate  which  he  will  have  to  pay  for  the  demand 
draft  with  which  to  pay  off  the  loan  when  it  comes  due. 
The  commission,  he  knows,  is  so-and-so-much  —  that  is 
fixed.  The  rate  at  which  he  can  sell  the  ninety-day  bills 
in  the  first  place  is  fixed,  too,  —  he  can  settle  that  before 
he  actually  makes  the  loan.  But  the  rate  he  will  have 
to  pay  for  his  demand  —  that  is  the  uncertain  question. 
During  the  three  months  the  loan  runs  the  rate  for 
demand  may  rise,  in  which  case  the  loan  will  prove  ex- 
pensive. On  the  other  hand  the  rate  for  demand  may 
fall,  in  which  case  the  loan  will  have  been  cheap.  What 
the  money  actually  will  cost  him,  in  other  words,  depends 
upon  the  action  of  the  exchange  market. 

Unless,  of  course,  not  wanting  to  take  the  chance  of 


94  FOREIGN  EXCHANGE  EXPLAINED 

having  the  loan  cost  him  a  lot  of  money  through  a  rise 
in  the  exchange  market,  he  secures  himself  by  buying 
a  "  future."  He  can  do  that  and  in  some  cases  he  does 
do  it;  but  in  the  great  majority  of  cases  he  doesn't. 
If  at  the  time  the  loan  is  made  the  exchange  market 
happens  to  be  away  down,  the  borrower  will  probably 
secure  himself  by  buying  a  future  and  thus  settling  the 
rate  in  advance  even  if  the  protection  costs  him  a  stiff 
price.  But  if,  when  the  loan  is  made,  he  can  get  a  good 
price  for  the  "  nineties,"  and  the  price  of  demand  is 
already  so  high  that  it  seems  more  likely  to  go  down  than 
to  go  up  further,  he  will  very  probably  take  a  chance. 
Many  a  sterling  loan,  he  is  apt  to  reflect,  is  paid  off  with 
demand  exchange  purchased  actually  at  a  lower  price 
than  the  "  nineties  "  were  originally  sold  for. 

So  much  for  the  borrower  and  what  he  has  to  pay. 
Now  what  does  the  lender  get  out  of  it  ?  Only  the  com- 
mission, and  that  less  what  his  New  York  banking 
correspondent  charges  him  for  handling  the  details  of 
the  transaction.  (Many  of  these  loans  are  made  "  joint- 
account  "  both  as  to  risk  and  profits.)  Not  very  much 
of  a  return,  is  the  natural  comment,  where  so  large  an 
amount  of  money  is  involved.  A  large  amount  of 
money?  —  Yes,  a  large  amount ;  but  not  of  the  banker's 
money.  He  doesn't  put  up  any  money.  All  he  does 
is  to  "  accept  "  a  draft  drawn  upon  him.  A  large  amount 
of  money,  it  is  true,  is  put  up,  but  that,  as  we  have  seen, 
comes  from  the  discount  market.  The  lending  bank, 
in  the  strict  sense  of  the  word,  isn't  a  lender  at  all  but 
rather  a  sort  of  broker  who,  through  the  machinery  at 
his  disposal,  puts  the  borrower  in  New  York  into  touch 


BANKERS'  LONG  BILLS  95 

with  the  discount  market  in  London.  For  which  ser- 
vice he  receives  the  commission  charged  the  borrower. 

Continuing  this  rather  analytical  view  of  what  has 
happened,  let  us  see  who  gets  the  difference  between  the 
$4.83  which  the  borrower  received  for  his  nineties  when 
the  loan  was  made,  and  the  $4.87  he  had  to  pay  for  his 
demand  when  the  loan  was  paid  off.  That  difference, 
a  little  thought  will  show,  goes  to  the  party  in  London 
who  discounts  the  bills.  It  is  just  that  difference,  in 
fact,  which  is  the  measure  of  the  amount  that  the  party 
in  London  who  discounts  the  bills  will  take  off  their 
face.  This  actual  discount,  reckoned  of  course,  in 
sterling,  was  the  very  thing  that,  with  the  price  of  de- 
mand at  4.87,  fixed  the  price  of  the  nineties  at  4.83. 

Renewals.  —  Loans  of  the  character  mentioned  above 
are  often  made  "  with  the  privilege  of  one  renewal." 
The  first  ninety  days  pass,  we  will  say,  and  the  borrower 
decides  to  avail  himself  of  his  option  and  renew.  At 
the  beginning,  however,  a  lot  of  ninety-day  sight  bills  were 
drawn  and  sold  in  the  open  market  and  these  have  got 
to  be  taken  care  of  by  a  remittance  from  this  side.  So 
what  happens  is  that  the  New  York  bank  draws  a  fresh 
lot  of  nineties,  the  proceeds  of  which  are  then  used  to 
take  care  of  the  first  lot  of  nineties  which  were  drawn 
when  the  loan  was  originally  made. 

The  second  lot  of  nineties  must  of  course  be  larger 
in  amount  than  the  first  lot.  Originally,  we  will  say 
£50,000  was  drawn.  That  comes  due  and  has  to  be 
paid  off  —  with  a  demand  draft  for  £50,000.  Another 
lot  of  ninety-day  bills  won't  do  the  trick  —  won't,  after 
they   have   been   discounted,   produce   enough   pounds 


96        foreign  exchange  explained 

sterling  to  pay  off  the  first  lot.  So  the  second  lot  has 
to  be  drawn  for  enough  more  than  the  first  lot,  so  that, 
when  the  second  lot  has  been  discounted,  there  will  still 
be  an  even  £50,000  left.  Assuming  that  the  discount 
rate  was  3%,  the  second  lot  would  probably  be  drawn 
for  £50,390,  the  £390  representing  the  discount  which 
would  have  to  be  taken  off  the  face  of  the  bills. 

What  has  been  described  above  is  the  straight  "  sterl- 
ing loan,"  with  the  borrower  taking  the  risk  of  ex- 
change. There  is,  however,  another  way  of  making 
these  loans  so  that  the  borrower  does  not  have  to  take 
that  risk.  In  that  case,  the  dollar  proceeds  of  the  ninety- 
day  bills  instead  of  the  ninety-day  bills  themselves  are 
handed  over  to  the  borrower.  And,  instead  of  paying 
a  commission  and  agreeing  to  return  a  demand  sterling 
draft  at  the  end  of  ninety  days,  the  borrower  pays  a 
flat  rate  of  interest  on  so-and-so-many  dollars  and  binds 
himself  to  return  that  many  dollars.  In  a  great  many 
cases  the  borrower,  indeed,  doesn't  know  anything 
about  its  being  money  raised  abroad  that  he  is  getting. 
All  he  knows  is  that  the  bank  is  lending  him  a  certain 
amount  of  money  for  which  he  is  going  to  pay  a  certain 
amount  of  interest  in  the  regular  way.  Where  the 
money  comes  from  is  of  no  more  concern  to  him  than 
if  it  represented  a  part  of  the  lender's  Philadelphia 
correspondent's  balance. 

Now  as  this  kind  of  a  loan  is  just  the  same  as  the  other 
so  far  as  drawing  ninety-day  bills  and  having  to  pay 
them  off  at  maturity  with  demand  bills  is  concerned, 
it  is  plain  that  somebody  has  got  to  take  the  risk  of  ex- 
change.    Nor  does  it  require  any  particular  acumen  to 


BANKERS'  LONG  BILLS  97 

see  that  it  is  the  lender  himself  who  must  take  this  risk. 
In  order  to  secure  the  dollars  to  lend  to  the  American 
bond  house,  the  London  bank  had  itself  drawn  on  by  its 
New  York  correspondent  and  those  bills  sold  to  third 
parties.  At  the  end  of  ninety-three  days  the  bills  will  be 
presented  and  have  to  be  paid.  Ten  days  before  that 
time  the  borrower  in  New  York,  it  is  true,  will  turn 
over  to  the  London  bank's  New  York  correspondent 
the  money  previously  loaned  him,  plus  interest.  That 
amount,  however,  will  be  in  dollars,  whereas  pounds 
are  needed.  It  will  thus  be  necessary  for  the  New  York 
bank  to  turn  into  pounds  the  dollars  returned  by  the 
borrower,  at  whatever  is  the  current  rate  of  exchange 
for  demand  drafts  —  unless,  of  course,  that  has  been 
previously  taken  care  of  through  the  purchase  of  a 
"  future." 

What  the  London  bank  makes  out  of  such  a  transac- 
tion, therefore,  is  the  interest  collected  from  the  borrower, 
less  the  difference  between  the  amount  of  dollars  realized 
from  the  sale  of  the  nineties,  and  the  amount  of  dollars 
paid  for  the  demand  drafts  when  the  transaction  is 
closed.  The  higher  the  rate  at  which  the  nineties  are 
sold  and  the  lower  the  rate  at  which  the  "  cover  "  is 
secured,  the  better  it  is  for  the  lending  bank. 

To  take  a  concrete  case,  suppose  the  amount  of  the 
loan  was  an  even  $50,000,  and  that  the  rate  for  ninety- 
day  bills  at  the  time  the  loan  was  made  was  4.84 
(£10,330  1 1/7  of  ninety-day  bills  would  have  to  be  sold 
at  that  rate  to  produce  $50,000).  The  rate  of  interest 
having  been  fixed  at  6  %,  at  the  end  of  the  ninety  days 
the  borrower  returns  $50,750.     The  rate  for  demand 


o8  FOREIGN  EXCHANGE  EXPLAINED 

bills  being,  we  will  say,  4.88,  the  £10,330  11/7  needed  by 
the  bank  will  cost  $50,413.24.  The  transaction  is  thus 
closed  at  a  profit  to  the  lending  bank  of  $336.76  less 
expenses.  A  small  enough  amount  to  be  sure,  but  one, 
it  must  always  be  realized,  which  was  earned  without 
the  banker  in  London  putting  up  a  dollar  in  real  money. 
And,  at  that,  $336.76  earned  on  $50,000  in  ninety  days 
represents  an  annual  interest  rate  of  nearly  3  %. 

The  amount  of  profit  on  foreign  loans  made  on  the 
above  basis  depending  to  such  an  extent  on  the  rate  at 
which  the  "  cover  "  is  secured,  it  stands  to  reason  that 
foreign  bankers  putting  out  money  in  this  market  do  it 
in  that  way  whenever  it  looks  to  them  as  though  the 
rate  for  demand  were  likely  to  go  down  during  the  life 
of  the  loan.  If,  at  the  time  the  loan  is  made,  the  rate 
for  demand  is  low  and  there  is  reason  to  think  it  may 
work  higher,  the  lending  banker  will  insist  on  passing 
along  to  the  borrower  the  "  risk  of  exchange."  If  he 
doesn't  want  to  take  it,  the  chances  are  that  he  will 
have  to  go  somewhere  else  for  his  money. 

A  time,  then,  when  foreign  loans  to  this  market  are 
being  very  generally  made  on  the  "  currency  "  basis 
is  apt  to  be  followed  by  a  period  of  falling  exchange  rates. 
Bankers  are  by  no  means  infallible  in  their  judgment 
as  to  the  swing  of  rates,  but  they  do,  at  least,  know  a 
great  deal  more  about  it  than  their  customers. 

Further  Considerations.  —  Before  leaving  this  ques- 
tion of  foreign  loans  in  the  American  market,  there  are 
one  or  two  other  things  to  be  considered.  Such  loans, 
in  the  first  place,  are,  very  frequently,  made  for  joint 
account,  the  profit  and  the  risk  being  equally  shared. 


BANKERS'  LONG  BILLS  99 

Foreign  bankers,  as  a  rule,  like  this  joint  account  ar- 
rangement, the  charge  which  the  American  correspondent 
makes  when  it  isn't  "  joint  "  being  pretty  nearly  half 
the  profits,  anyway.  And,  of  course,  where  the  trans- 
action is  for  joint  account  and  the  American  banker 
is  taking  half  the  risk,  there  is  a  natural  feeling  on  the 
part  of  the  banker  abroad  that  his  interests  are  being 
better  taken  care  of.  The  American  banker  will,  in 
the  first  place,  be  more  careful  as  to  the  party  to  whom 
he  lends  the  money,  and,  in  the  second  place,  he  will  not 
only  more  closely  scrutinize  the  collateral  but  will  see 
to  it  more  carefully  that  the  market  value  of  the  collat- 
eral is  kept  up  to  the  agreed  percentage  of  margin 
above  the  face  of  the  loan.  Theoretically,  when  the 
American  banker  is  acting  merely  as  agent,  for  a  com- 
mission, these  things  should  be  taken  just  as  good  care 
of;  but,  practically,  there  is  nothing  like  having  an 
interest  in  a  proposition  to  get  it  your  best  possible 
attention. 

Another  thing  to  be  considered  is  the  reason,  alluded 
to  in  an  earlier  chapter,  why  foreign  loans  will  often  be 
made  in  the  American  market  and  on  a  very  considerable 
scale  even  at  times  when  the  money  rate  here  is  little, 
if  any,  more  attractive  than  it  is  abroad.  Several  things 
may  bring  that  about.  In  the  first  place  the  money 
may  be  loaned  here  not  so  much  because  there  is  any 
great  demand  for  it,  as  because  exchange  conditions  — 
a  high  rate  for  ninety-day  bills,  for  example,  and  an  out- 
look for  a  lower  price  for  demand  —  make  it  seem  to  the 
foreign  banker  as  though  the  lending  of  money  here, 
with  him   (the  banker)   taking  the  risk  of  exchange, 


ioo  FOREIGN  EXCHANGE  EXPLAINED 

would  work  out  exceptionally  well.  (Many  a  pound 
sterling  has  come  into  the  American  money  market 
merely  because  ninety-day  bills  happened  at  the  time 
to  be  selling  so  high  that  bankers  couldn't  resist  the 
temptation  to  take  the  mild  speculation  involved.) 
Then  in  the  second  place,  a  good  many  American  bor- 
rowers, the  stock  and  investment  houses  principally, 
keep  foreign  loans  running  practically  the  year  round, 
merely  in  order  to  be  sure  that  the  sources  of  supply 
are  kept  open.  Thirdly,  foreign  money  is  often  ex- 
tensively borrowed  here  by  stock  market  operators 
who  do  not  want  their  own  banks  to  know  what  they 
are  doing. 

Some  interesting  episodes  could  be  here  set  down  as 
to  borrowing  of  the  last-named  sort,  but  space  requires 
that  we  confine  ourselves  to  the  foreign  exchange  aspect 
of  the  question.  And  from  that  angle  there  will  readily 
be  seen  the  superior  chances  of  concealment  where  a 
large  amount  of  money  is  to  be  borrowed  and  the  bor- 
rower does  not  want  the  banks  here  to  know  it.  Mak- 
ing straight  time  loans  in  the  domestic  market  would 
mean  the  giving  out  of  orders  to  money  brokers,  after 
which  the  collateral  would  be  deposited  with  institu- 
tional banks  all  over  the  city  —  just  what  the  borrowers 
want  to  avoid.  Negotiation  abroad  of  the  whole  amount 
needed  could,  on  the  other  hand,  in  all  probability  be 
made  through  one  agency  in  New  York,  and  that  some 
firm  of  private  bankers.  Then  when  the  loans  were 
made,  the  collateral  would  all  go  to  one  place ;  and  the 
only  possible  inkling  any  one  could  have  that  a  large 
amount  of  money  was  being  loaned  from  the  other  side 


BANKERS'  LONG  BILLS  101 

would  come  from  increased  offerings  of  long  bills  in 
the  exchange  market.  And  that,  unless  the  market 
happened  to  be  particularly  weak  and  susceptible,  could 
be  easily  enough  arranged  so  that  no  one  could  possibly 
tell  the  purpose  for  which  the  bills  were  being  offered. 


CHAPTER  XIII 

{Continued) 

bankers'  long  bills 

Finance  Bills.  —  We  have  now  to  consider  what  is 
perhaps  the  most  misunderstood  of  all  classes  of  ex- 
change, and  withal  one  of  the  most  important  —  the 
"  Finance  Bill."  Make  inquiry,  even  among  those 
actively  engaged  in  the  exchange  business,  as  to  what 
the  finance  bill  is  and  what  it  is  used  for,  and  the  chances 
are  that  you  will  be  amazed  by  the  divergence  of  the 
expression  you  call  forth.  Almost  generally  you  will 
find  a  tendency  to  confuse  the  finance  bill  with  the  loan 
bill  which  has  just  been  described. 

Now  the  finance  bill  is  essentially  different  from  the 
loan  bill  in  that  the  loan  bill  is  issued  by  bankers 
who  want  to  lend  out  money  to  third  parties,  on  collateral, 
whereas  the  finance  bill  represents  nothing  more  than 
the  drawing  of  long  drafts  by  one  banker  on  another  for 
the  purpose  of  raising  money  to  be  used  by  either  banker 
or  both.  In  the  case  of  a  loan  bill  John  Smith  borrows 
money  from  the  First  National  Bank  and  puts  up  good 
and  sufficient  collateral  for  its  repayment.  In  the  case 
of  a  finance  bill,  the  First  National  Bank  draws  a  time 
draft  on  the  Second  National  Bank,  turns  it  into  ready 
money,  and  uses  the  money  (sometimes  alone  and  some- 


BANKERS'  LONG  BILLS  103 

times,  in  connection  with  the  drawee)  for  any  purpose 
it  sees  fit. 

There  is,  of  course,  no  apparent  difference  in  appear- 
ance between  a  loan  bill  and  a  finance  bill,  or,  in  fact, 
any  other  kind  of  a  bankers'  long  bill.  The  circumstances 
which  bring  them  into  existence  vary  greatly,  but  the 
bills  themselves,  after  they  have  been  uttered,  are  all 
exactly  alike.  To  the  buyer  they  are  all  just  bankers' 
long  bills  and  all  he  has  to  buy  them  on  is  the  name  of 
the  maker  and  the  name  of  the  drawee.  When  you  buy 
a  bankers'  long  bill  you  have  no  possible  way  of  telling 
whether  it  is  a  loan  bill  or  a  finance  bill  or  what  it  is. 
Neither  has  the  discount  market  —  except  that  it  can 
have  its  suspicions. 

Bills  Issued  to  Pay  for  Securities.  —  The  first  purpose 
for  which  finance  bills  are  issued,  as  set  forth  in  the  little 
table  at  the  beginning  of  the  chapter,  is  in  order  to  raise 
money  to  finance  the  purchase  of  stocks  and  bonds. 
A  pool  is  formed  by  half  a  dozen  banking  houses,  we  will 
say,  in  United  States  Steel ;  with  Messrs.  John  Jones  & 
Co.  agreeing  to  furnish  the  money  to  buy  so-and-so-many 
shares.  Messrs.  Jones  &  Co.,  not  wanting  to  put  up 
that  much  money  themselves,  cable  their  correspondents 
in  London  offering  to  divide  their  share  in  the  pool  with 
them,  the  money  to  be  raised  by  having  Jones  &  Co. 
draw  ninety  days'  sight  bills  on  London.  Before  the 
ninety  days  are  up  and  the  bills  have  to  be  covered,  the 
cable  suggests,  the  pool  will  have  sold  out  and  made  its 
profit.  If  the  stock  market  operation  runs  over  the 
ninety  days,  a  fresh  lot  of  nineties  can  be  drawn  to  take 
care  of  the  first  lot. 


io4         FOREIGN  EXCHANGE  EXPLAINED 

The  experience  of  the  London  banking  house  in  the 
past  having  been  that  when  so  invited  they  generally 
make  money,  the  chances  are  that  a  cable  will  come  back 
telling  the  New  York  house  to  count  them  in  and  go 
ahead  and  draw  on  them.  And  so  the  question  as  to 
where  the  money  for  Jones  &  Co.'s  participation  in  the 
pool  is  to  come  from  is  solved. 

The  same  thing  is  likely  to  happen  any  time  that 
Jones  &  Co.,  Bankers,  instead  of  joining  a  pool  in  United 
States  Steel  stock,  are  invited  to  assist  in  the  flotation 
of  a  new  bond  issue  and  to  "  bring  in  some  of  their 
foreign  friends."  Very  likely  the  foreign  friends  will 
be  glad  enough  to  accept  the  invitation,  the  under- 
standing being  that  the  money  they  are  to  put  up  is 
to  be  raised  through  the  sale  of  long  bills  drawn  upon 
them.  Messrs.  Jones  &  Co.  go  ahead  and  draw  —  very 
likely  for  enough  to  cover  not  only  their  foreign  corre- 
spondent's participation  but  their  own  as  well.  The 
bills  are  then  sold  in  the  exchange  market  and  Jones  & 
Co.  have  the  necessary  funds  in  hand.  Very  probably 
before  the  bills  come  due  and  have  to  be  paid,  all  the 
bonds  will  have  been  disposed  of,  the  money  with  which 
to  furnish  the  needed  "  cover  "  being  thus  provided. 
If  the  distribution  of  the  bonds  takes  longer  than  ex- 
pected, the  finance  bill  arrangement  can  be  kept  going 
by  drawing  fresh  lots  of  bills  every  ninety  days.  Each 
time,  as  previously  explained,  the  amount  drawn  must 
be  increased,  but  that  increase  is  nothing  but  in- 
terest, and  probably  no  more  than  would  have  to 
be  paid  on  a  time  loan  made  in  the  home  market  in 
the  regular  way. 


BANKERS'  LONG  BILLS  105 

Bills  Issued  to  Take  Advantage  of  Exchange  Rates.  — 

The  second  reason  why  finance  bills  are  drawn  is  in 
order  to  profit  by  a  possible  decline  in  the  exchange  rate. 
While  we  were  discussing  loan  bills  we  saw  how  loans 
of  foreign  capital  are  at  times  fairly  forced  on  the  bor- 
rower here,  simply  because  the  banker  abroad  figures 
that  a  break  in  the  rate  of  exchange  on  London  is  coming 
and  wants  to  use  this  means  of  taking  advantage  of  it. 
The  same  thing  happens  to  an  even  more  marked  ex- 
tent in  the  case  of  finance  bills,  where  no  regular  borrower 
has  to  be  found.  Take  a  time,  for  instance  in  the  spring 
when  agricultural  exports  are  not  heavy,  when  the  rate 
of  exchange  on  London  is  away  up  —  4.85,  perhaps, 
for  ninety-day  bills  and  4.88  for  demand.  Now,  while 
there  is  no  certainty  about  it,  there  is  every  possible 
prospect  that  a  lot  of  finance  bills  sold  at  4.85  under  such 
circumstances  can  later  be  covered  at  a  considerably 
lower  rate  than  4.88.  Not  inconceivably,  when  the  crops 
begin  to  move  abroad  and  a  large  amount  of  bills  drawn 
against  them  are  pressed  for  sale  on  the  market,  the  rate 
for  demand  bills  will  fall  as  low  as  the  point  at  which 
the  nineties  were  previously  sold.  And,  of  course,  if 
that  happens  and  the  needed  "  cover  "  is  secured,  say 
at  4.85,  the  banker  who  drew  the  finance  bills  and  the 
banker  on  whom  they  were  drawn  will  have  had  the 
use  of  the  money  for  three  months  for  absolutely  nothing. 
Just  prior  to  a  jump  in  the  money  market,  finance 
bills,  drawn  by  bankers  who  are  in  a  position  to  see  it 
coming,  are  apt  to  make  their  appearance  in  large 
amount.  There  is,  in  the  first  place,  the  fact  that  the 
rise  in  money  rates  is  more  than  likely  to  react  on  the 


106  FOREIGN  EXCHANGE  EXPLAINED 

rate  of  exchange  and  drive  it  down  (Chapter  XI). 
Secondly,  a  time  when  money  rates  are  getting  up  is 
a  good  time  to  have  money  around  the  use  of  which 
isn't  costing  you  anything. 

Bills  Issued  for  Capital  Purposes.  —  The  third  pur- 
pose for  which  finance  bills  are  drawn  is,  strange  as  it 
may  seem,  for  the  purpose  of  providing  working  capital. 
Needless  to  say,  the  large  institutions  which  deal  in  ex- 
change hardly  find  it  necessary  to  add  to  their  resources 
in  that  way,  but  among  those  whose  long  paper  is 
readily  enough  salable  in  the  exchange  market  there 
are  a  good  many  banking  houses  that  do.  Particularly 
is  this  the  case  where  a  banking  house  has  its  own 
branch  abroad  or  where  the  connection  is  extremely 
close  between  some  house  on  this  side  and  some  house 
on  the  other.  In  such  cases  it  is  not  unusual  for  an 
indefinite  credit  to  be  extended.  The  New  York  house, 
in  other  words,  might  draw  a  certain  amount  of  long 
bills  at  the  start,  replace  them  with  another  lot  at  the 
end  of  ninety  days,  do  it  again  at  the  end  of  six  months, 
and  so  on  for  as  long  as  it  had  use  for  the  money  in  its 
business. 

In  the  case  of  a  banking  house  in  New  York  which 
failed  some  years  ago  and  which,  up  to  within  a  short 
time  of  the  failure,  enjoyed  a  credit  sufficiently  good  to 
allow  the  sale  at  current  prices  of  large  amounts  of  its 
long  paper,  it  is  said  that  it  was  found  that  the  proceeds 
of  such  sales  constituted  about  all  the  working  capital 
the  house  had.  That,  of  course,  is  an  isolated  instance, 
and  in  no  way  indicative  of  the  way  in  which  finance 
bills  are  generally  used.     It  does,  however,  serve  as  a 


BANKERS'  LONG  BILLS  107 

striking  illustration  of  how,  where  the  connection  abroad 
is  sufficiently  close  and  the  credit  of  the  two  houses  is 
sufficiently  good,  the  use  of  the  finance  bill  can  be  pushed 
to  the  limit. 

Where,  in  the  above  case  —  in  any  case  where  money 
is  raised  by  the  sale  of  finance  bills  —  does  the  money 
really  come  from?  From  the  discount  market  at  the 
place  on  which  the  bills  are  drawn.  A  firm  issues  finance 
bills  and  sells  them.  The  only  reason  it  can  sell  them  is 
because  the  buyer  knows  he  is  getting  something  that 
the  discount  market  wants  and  is  willing  to  pay  money 
for.  It  is  this  money  from  the  discount  market,  coming 
to  him  directly  or  indirectly  as  you  care  to  look  at  it, 
which  the  drawer  of  finance  bills  uses. 


CHAPTER  XIV 

IMPORT  AND  EXPORT  CREDITS 

Ever  since  there  have  been  bankers,  bankers  have 
assisted  in  the  financing  of  merchandise  exports  and 
imports.  It  has  been  only  during  recent  years,  however, 
that  that  great  phase  of  the  exchange  business  expressed 
by  the  term  "  bankers'  credits  "  has  been  brought  to 
any  degree  of  standardization.  Even  to-day,  while 
the  expression  "  bankers'  credit  "  has  come  to  mean 
about  the  same  thing  to  a  good  many  people,  there  is  a 
wide  variance  in  the  credits  themselves  and  in  the  condi- 
tions under  which  they  are  issued. 

With  the  passing  of  a  large  part  of  the  business  of 
issuing  commercial  credits  from  the  private  bankers  (who, 
up  to  the  beginning  of  this  century,  had  an  absolute 
monopoly  of  it)  to  the  large  institutional  banks,  the 
business  has,  however,  assumed  a  form  sufficiently  defi- 
nite to  allow  an  intelligent  study  to  be  made  of  it. 
It  would  be  a  mistake,  though,  for  the  reader  to  imagine 
that  there  can  be  set  down  in  black  and  white  a  de- 
scription of  all  the  different  kinds  of  commercial  credits 
that  bankers  issue.  Their  name  is  legion,  and  almost 
infinite  are  the  variations  made  to  meet  special  cir- 
cumstances and  special  requirements. 

108 


IMPORT  AND  EXPORT  CREDITS     109 

The  Bankers'  Credit  an  Authorization.  —  One  great 
principle,  however,  underlies  the  whole  business.  All 
bankers'  credits  —  and  this  is  true  whether  the  credit  is 
issued  to  facilitate  the  import  of  matting  from  Japan 
or  the  export  of  machinery  to  South  America  —  all 
bankers'  credits  are  an  authorization,  for  somebody,  who 
has  money  coming  to  him,  to  draw  drafts  on  a  banker, 
somewhere.  According  to  the  particular  transaction 
involved,  the  authorization  may  be  for  an  American 
exporter  to  draw  dollar  drafts  on  a  bank  in  New  York 
or  sterling  drafts  on  a  bank  in  London,  or,  on  the  other 
hand,  for  a  shipper  of  goods  in  the  Far  East  to  draw 
franc  drafts  on  Paris.  The  combinations,  as  stated 
previously,  are  almost  without  number.  But,  what  is 
true  in  the  case  of  practically  every  bankers'  credit 
ever  issued,  is  that  some  merchant  has  gone  to  some 
banker  and  secured  from  that  banker  an  authorization  for 
himself  or  some  other  merchant  to  draw  drafts  on  that 
banker  or  on  his  correspondent. 

The  reason  why  the  credit  is  in  the  form  of  an  author- 
ization is,  of  course,  because  the  merchant  almost  in- 
variably wants  to  turn  his  claim  over  to  some  one  else,  i.e. 
sell  the  drafts  he  has  drawn.  Naturally,  if  he  can  show 
to  the  prospective  buyer  of  the  drafts  his  authorization 
by  some  responsible  banking  institution  to  draw,  he  is 
going  to  be  able  to  dispose  of  those  drafts  more  easily  and 
at  a  higher  rate  of  exchange  than  if  he  can  show  no  such 
authorization. 

The  raison  d'etre  for  the  system  of  bank  credits 
("  commercial  credits  "  they  are  usually  called),  is  that 
from  the  standpoint  of  the  merchant  in  one  country  who 


no  FOREIGN  EXCHANGE  EXPLAINED 

has  a  claim  against  a  merchant  in  another  country,  the 
right  to  draw  on  some  bank  and  in  a  currency  readily 

,  * Guaranty  Trust  Company  of  New  York 

t   60,000.-  *-        * 

Foreign  Department 


New  Tort.      JfaroagO^  m  J, 

Sumatra  Trading  Soolety. 


Padang. 


Gentlemen: 

We  hereby  authorize  you  to  value  on  the  Guaranty  Trust  Company  of  New  York,  S3  Lombard  St*. 
London,  for  account  nf       American  Tobaooo  Corporation, 


up  to  an  aggregate  ■mount of    ffitt*  thonsand-  Po^ds  Sterling  — 


available  by  your  drafts  at 

•    *  t.            *     Tobacco 
against  shipment  of v 


ninety   (90)   days  sight 


inanvan™    &  War  Fiaii  certificates  to  aocompany  draft  a . 

Bilk  of  Lading  for  such  shipments  must  be  made  out  to  the  order  of  the  Guaranty  Trust  Company 
of  New  York,  unless  otherwise  specified  in  this  credit 

CONSULAR  INVOICE  AND  ONE  BILL  OF  LADING  MUST  BE  SENT  BT  THE  BANK  OR  BANKER  NEGOTOATINQ 
DRAFTS,  DIRECT  TO  THE  GUARANTY  TRUST  COMPANY  OF  NEW  YORK.  NEW  YORK,  UNDER  ADVICE  TO  GUARANTY 
TRUST  COMPANY  OF  NEW  YORK,  LONDON. 

The  remaining  documents  must  accompany  the  drafts  drawn  on  Guaranty  Trust  Company  of  Now 
York.   London. 

The  amount  of  each  draft  negotiated,  together  with  date  of  negotiation,  must  be  endorsed  on  back' 
hereof. 

We  hereby  agree  with  bona  fide  holders  that  all  drafts  drawn  by  virtue  of  this  Credit,  and  to 
accordance  with  the  above  stipulated  terms,  shall  meet  with  due  honor  upon  presentation  at  the  Office  of  the 
Guaranty  Trust  Company  of  New  York,  London,  if  drawn  and  negotiated  prior  to        ,-Mov.    D  1917. 


Guaranty  Trust  Company  ofWw  York, 


0* 


oOttw 


N.  B:    Drafts  drown  under  tills  Credit  must  state  A 

that   they   ore    "drown   under    Letter  of 
Credit  m»  3-0°00    ■ 

Commercial  Letter  of  Credit  —  Sterling 

convertible  into  his  own,  is  greatly  preferable  to  the 
right  to  draw  directly  on  the  party  who  owes  him  the 
money.     Where  the  debtor  is  a  mercantile  establishment 


IMPORT  AND  EXPORT  CREDITS     in 

of  large  means  and  with  an  international  reputation,  it 
doesn't  make  so  much  difference,  but  in  the  ordinary  run 
of  business  between  houses  of  average  standing  it  does 
make  a  very  great  difference.  An  exporting  firm  out  in 
Rangoon  or  Calcutta,  for  example,  might  willingly  ship 
goods  to  a  moderately  rated  firm  in  America  provided 
the  American  firm  furnishes  a  bank  credit  under  which 
the  Far  Eastern  exporter  can  draw  in  sterling  on  London, 
whereas,  if  no  such  credit  were  provided  and  the  shipper 
had  to  draw  direct  on  the  importer  in  dollars,  the  shipper 
would  in  all  probability  refuse  to  do  the  business. 

Probably  the  clearest  and  cleanest  way  of  getting  at 
the  theory  and  practice  of  bank  credits  is  to  take  an 
actual  transaction  and  follow  it  through  its  successive 
steps.  No  one  transaction,  of  course,  can  absolutely 
epitomize  all  the  rest,  but  it  is  a  fact  that  if  we  take  a 
case,  for  instance,  where  a  modestly  rated  American  firm 
is  importing  merchandise  from  the  Far  East  under  bank 
credits  authorizing  the  shipper  to  draw  in  sterling  on 
London,  we  are  getting  a  case  where  pretty  much  all  the 
salient  features  of  a  commercial  credit  transaction  appear. 
Let  us,  then,  take  a  definite  instance  where  a  shipment  of 
shellac  is  made  from  some  port  in  India  to  the  United 
States,  payment  being  arranged  by  bankers'  credit,  and 
follow  it  along  not  only  as  to  its  material  details  but  also 
as  to  the  whys  and  wherefores  of  the  successive  steps 
taken. 

The  Credit  and  the  Price  of  the  Goods.  —  The  terms 
on  which  payment  is  to  be  made,  in  the  first  place, 
exert  an  important  influence  on  the  price  which  the  Cal- 
cutta merchant  will  quote  for  his  shellac.     If,  in  his 


ii2  FOREIGN  EXCHANGE  EXPLAINED 

cable,  the  New  York  importer  offers  to  send  out  a  bankers' 
credit  under  which  the  shipper  can  draw  drafts  on  some 
London  bank  at  three  months'  sight,  it  stands  to  reason 
that  the  Calcutta  merchant  will  sell  him  the  shellac 
cheaper  than  if  the  forthcoming  bankers'  credit  requires 
that  the  drafts  be  drawn  at  jour  or  six  months'  sight. 
The  shorter  the  term  of  the  drafts  he  is  going  to  draw,  the 
better  it  is  for  the  shipper.  As  soon  as  he  draws  he  is 
going  to  sell  the  drafts  for  rupees  at  the  current  rate  of 
exchange,  and  the  shorter  the  term  of  the  drafts,  of 
course,  the  higher  will  be  the  rate  he  will  get. 

The  question  of  price  and  the  terms  of  payment 
having  been  settled,  the  importer  here  applies  to  his 
bank  for  the  kind  of  credit  he  has  agreed  to  send  out 
to  the  East.  In  this  case,  we  will  say,  he  has  agreed 
to  send  out  a  credit  under  which  the  shellac  exporter 
in  Calcutta  is  to  be  authorized  to  draw  on  some  bank  in 
London,  at  four  months'  sight,  for  the  invoice  value  of 
the  goods  shipped,  all  bills  of  lading  and  other  documents 
to  be  attached  to  the  draft.  It  is  agreed,  furthermore, 
that  it  is  to  be  a  confirmed  credit  —  that  is  to  say,  that 
the  bank  in  London  whose  New  York  correspondent  is 
isuing  the  credit,  is  to  confirm  to  the  Calcutta  shipper 
the  fact  of  the  credit's  having  been  opened.  That  having 
been  done,  the  London  bank  is  bound  to  accept  drafts 
drawn  under  the  credit  as  long  as  they  are  in  order,  and 
cannot  cancel  the  credit  until  the  regular  date  of  expira- 
tion noted  thereon. 

If  the  New  York  importer  is  in  the  habit  of  regularly 
using  bankers'  credits,  the  chances  are  that  he  will  have 
a  "  line  "  established  at  his  bank,  and  that  if  he  is  inside 


IMPORT  AND   EXPORT  CREDITS  113 

of  his  "  line,"  the  credit  will  be  issued  to  him  within  a 
couple  of  hours  after  he  has  made  his  application.  All 
the  details  as  to  the  commission  he  is  to  be  charged,  the 
terms  on  which  the  goods  are  to  be  turned  over  to  him 
when  they  arrive,  etc.,  will  have  been  previously  ar- 
ranged. All  that  is  exactly  as  though  he  were  making 
a  loan  at  his  bank,  though  in  this  case,  of  course,  the 
importer  gets  no  money  from  his  bank,  but  merely  a 


New  Yark^.. 


Guaranty  Trust  Company  of  New  York 

Gentlemen 

Having  received  from  you  the  Letter  of  Credit  of  winch  a  true  copy  ts  on  the  other  ad*. 

hereby  agree  to  its  terms,  and  tn  consideration  thereof  w  agree  with  you  to  provide  tn  Nea 

York,  twelve  days  previous  Iff  the  Maturity  of  the  Bills  drawn  tn  virtue  thereof,  sufficient  funds  tn 

cash,  or  in  Bills  on  London,  satisfactory  to  you,  at  not  exceeding  sixty  days'  sight,  and  endorsed 

by  JJ,  to  meet  the  payment  of  the  same  with. _ 4>er  cent,  commission  and 

Merest  as  hereinafter  provided,  and  I  undertake  to  insure  a,  %  expense,  for  your  benefit, 
against  risk  of  Fire  or  Sea,  all  property  purchased  or  shipped  pursuant  to  said  Letter  of  Credit. 
tn  Companies  satisfactory  to  you 

Wt  agree  that  the  title  to  all  property  which  shall  be  purchased  or  shipped  under  the 
said  credit,  the  bills  of  lading  thereof,  the  policies  of  insurance  thereon  and  the  whole  of  the 
proceeds  thereof,  shall  be  and  remain  in  you  until  the  payment  of  the  bills  referred  to  and  of 
aU  sums  that  may  be  due  or  thai  may  become  due  on  said  bills  or  otherwise,  and  until  the  payment 
of  any  and  all  other  indebtedness  and  liability  now  existing  or  now  or  hereafter  created  or  incurred 
by  m  to  you  on  any  and  all  other  transactions  now  or  hereafter  had  with  you.  with  authority  to 
take  possession  of  the  same  and  to  dispose  thereof  at  your  discretion  for  your  reimbursement  as 
aforesaid,  at  public  or  private  sale,  without  demand  or  notice,  and  to  charge  all  expenses  including 
commission  for  sale  and  guarantee 

Should  the  market  value  of  said  merchandise  m  New  York,  either  before  or  after  its  arrival, 
loll  so  that  the  net  proceeds  thereof  {all  expenses,  freight,  duties,  etc..  being  deducted)  would  be 
insufficient  to  covcWyour  advances  thereagatnst  with  commission  and  interest  ^  further  agree  to 
give  you  on  demand  any  jfthcr  security  you  may  require,  and  m  default  thereof  you  shall  be  enti- 
tled to  sell  said  merchandise  fo^/wtth.  or  to  sell  "to  arrive'  irrespective  of  the  maturity  of  the 
acceptances  under  this  Credit.  m  bomg  held  responsible  to  you  for  any  deficit,  which  J^  bind  and 
oblige  £rstiK>  u  f°y  yon  m  VUm  ■"  iem"nd- 


\i4  FOREIGN  EXCHANGE  EXPLAINED 

//  is  understood  that  in  all  payments  made  by  "?  to  yon  in  the  United  States,  tile  Pound 
Sterling  shall  be  calculated  at  the  current  rate  of  exchange  for  Bankers'  Bills  in  New  York  on 
London  existing  at  the  ltnu\  oj  settlement,  and  thai  interest  shall  be  charged  at  the  rate  of  fb*  pee 
cent   per  annum,  or  at  the  current  Bank  a]  England  rate  in  London  if  above  five  per  cent. 

Should  VK  anticipate  the  payment  of  any  portion  of  the  amount  payable,  interest  it  to  be 
allowed  at  a  rate  one  per  cent,  under  the  current  Bank  of  England  rate. 

In  case  uv  should  hereafter  desire  to  have  this  credit  confirmed,  altered  or  extended  by 
table  (which  will  be  at  "*J  expense  and  risk),  hereby  agree  to  hold  you  harmless  and  free  from 
responsibility  from  errors  in  cabling,  whether  on  the  part  of  yourselves  or  your  Agents,  here  or 
elsewhere,  or  on  the  part  of  the  cable  companies 

This  obligation  u  to  continue  in  force,  and  to  be  applicable  to  aD  transactions,  notwith- 
standing  any  change  m  the  composition  of  the  firm  or  firms,  parties  to  this  contract  or  in  the  user 
of  this  credit,  whether  such  change  shall  arise  from  the  accession  of  one  or  more  new  partners,  or 
from  the  death  or  secession  of  any  partner  or  partners 

It  m  understood  and  agreed  that  if  the  documents  representing  the  property  for  which  the 
said  Credit  has  been  issued  are  surrendered  under  a  trust  receipt,  collateral  security  satisfactory  IB 
the  Company,  such  as  stocks,  bonds,  warehouse  receipts  or  other  security,  shall  be  given  to  the 
Company,  to  be  held  until  the  terms  of  the  credit  have  been  fully  satisfied  and  subject  in  entry 
respect  to  the  conditions  of  this  agreement 

ft  is  further  understood  and  agreed  m  the  event  oj  any  suspension,  or  failure,  or  assign- 
ment for  the  benefit  of  creditors  on  ~*  part,  or  of  the  nonpayment  at  maturity  of  any  acceptance 
made  by  ,  or  of  the  nonfulfillment  of  any  obligation  under  said  credit  or  under  any  other  credit 
issued  by  the  Guaranty  Trust  Company  of  New  York  on  "*  account,  or  of  any  indebtedness  or 
liability  on  "J  part  to  you,  all  obligations,  acceptances,  indebl'dness  and  liabilities  whatsoever 
shall  thereupon,  at  your  opium  then  or  thereajter  exercised,  without  notice,  mature  and  become 
due  and  payable. 

It  is  understood  and  agreed  that  you  shall  not  be  held  responsible  for  the  correctness  or 
validity  of  the  documents  representing  shipment  or  shipments,  not  for  the  description,  quantities 
or  quality  of  the  merchandise  declared  therein 

Agreement  Signed  by  Importer  —  Sterling  Credits 

formal  letter  authorizing  the  exporter  out  in  Calcutta  to 
draw  on  London. 

The  form  in  which  such  credits  are  issued  varies  consid- 
erably, according  to  the  relationship  of  the  bank  in  New 
York  which  is  issuing  the  credit  to  the  bank  in  London  on 
whom  the  credit  is  issued  (on  whom  the  drafts  under  the 
credit  are  going  to  be  drawn).  In  some  cases  credits  are 
issued  on  the  New  York  banker's  London  branch.     In 


IMPORT  AND  EXPORT  CREDITS     115 

others,  the  New  York  bank  has  power  to  sign  for,  and 
legally  bind,  the  bank  in  London  on  whom  it  issues  its 
credits.  All  that,  however,  is  a  mere  matter  of  detail. 
What  counts  is  that  when  the  importer  here  has  gotten 
his  bank  to  issue  the  credit  he  comes  into  possession  of  a 
document  which  he  can  send  to  the  shipper  in  the  East 
and  which  authorizes  that  shipper  to  draw  on  London 
for  the  invoice  value  of  the  goods  he  is  shipping  — 
furthermore,  which  cannot  be  cancelled  as  long  as  the 
shipper  lives  up  to  the  terms  of  his  contract. 

From  the  shipper's  standpoint  such  an  arrangement 
is  ideal,  and  to  those  buyers  of  his  merchandise  in  foreign 
countries  who  are  able  to  furnish  him  with  such  facilities 
he  will  naturally  quote  his  best  possible  prices.  What  it 
means  is  that  he  gets  paid  for  his  merchandise  as  soon 
as  he  puts  it  on  board  ship.  All  he  has  to  do  is  to  go 
ahead  and  draw  his  draft  on  the  bank  in  London  which 
confirmed  the  credit  to  him,  attach  the  bills  of  lading 
and  other  papers,  take  it  around  to  his  bank  together  with 
his  authorization  to  draw  (the  bankers'  credit),  and  get 
rupees  for  it  at  the  current  rate.  For  such  drafts  there 
is  always  a  ready  and  close  market. 

But,  it  may  be  objected,  is  not  this  buying  of  the 
shellac  by  cable  and  then  holding  up  its  shipment  from 
the  East  all  the  while  that  the  bankers'  credit  is  on  its 
way  out  to  Calcutta  a  slow  and  cumbersome  way  of 
doing  the  business  ?  Answer  to  that  is  found  in  the  fact 
that  when  there  is  any  hurry  about  the  merchandise 
coming  forward,  the  bankers'  credit  can  be  cabled. 
The  shipper  out  in  Calcutta,  in  that  case,  will  not,  of 
course,  have  a  formal  signed  authorization  to  draw,  but  if 


n6  FOREIGN  EXCHANGE  EXPLAINED 

he  is  a  merchant  in  good  standing,  that  will  not  stand  in 
the  way  of  his  negotiating  his  drafts.  The  cabled  con- 
firmation from  the  London  bank  will  almost  invariably  be 
regarded  as  sufficient  warrant  for  the  drawing  of  the 
drafts,  by  the  local  bank  whom  he  is  asking  to  take  them 
off  his  hands. 

The  Sterling  vs.  the  Dollar  Credit.  —  Just  here  enters 
the  question  as  to  why  London  is  chosen  as  the  point 
on  which  the  shipper  draws  his  draft.  It  is  plain  enough, 
of  course,  that  where  a  not  particularly  well-known 
American  importing  house  is  concerned,  it  would  be  out 
of  the  question  to  have  the  shipper  draw  in  dollars  direct 
on  the  American  consignee.  But  why  can't  the  con- 
signee arrange  to  have  the  exporter  draw,  if  not  on  him, 
on  his  ban!:  in  New  York?  If  the  importer  can  arrange 
it  to  have  the  shipper  out  in  the  East  draw  on  his  (the 
importer's)  bank's  London  correspondent,  why  can't  he 
arrange  it  to  have  the  drafts  drawn  direct  on  New  York  ? 
Why,  in  other  words,  drag  London  into  the  transaction 
at  all? 

The  answer  is  that  if  the  importer  here  is  to  buy 
goods  abroad  at  the  best  possible  price,  he  must  furnish 
the  seller  with  the  best  and  quickest  means  of  getting 
his  money.  And  beyond  argument  or  question,  in  most 
parts  of  the  inhabited  earth  the  draft  drawn  in  sterling 
on  London  is  superior  to  the  draft  drawn  in  dollars  on 
New  York.  Superior,  not  in  that  it  is  one  whit  safer  or 
more  likely  to  be  paid  at  maturity,  but  simply  in  that  it 
can  be  turned  into  more  rupees  or  taels,  or  yen,  or  what- 
ever the  local  currency  may  be.  Which  is,  of  course, 
what  the  shipper  cares  most  about. 


IMPORT  AND  EXPORT  CREDITS     117 

The  above  is  written  with  full  realization  of  the 
progress  in  popular  favor  made  by  the  dollar  draft  during 
the  past  few  years.  Because  the  dollar  draft  to-day, 
however,  is  known  and  recognized  in  places  where  it 
wasn't  known  and  recognized  a  decade  ago,  is  no  reason 
to  claim  that  it  has  in  any  way  taken  the  place  of  the 
sterling  draft  on  London.  Here  and  there,  for  the 
time  being,  it  is  possible  to  point  to  places  where 
the  dollar  draft  is  in  just  as  great  or  even  greater 
favor  than  the  sterling  draft,  but  that  is  the  excep- 
tion and  not  the  rule. 

The  truth  of  the  matter,  and  we  in  America  may  just 
as  well  recognize  it,  is  that  as  long  as  foreign  exchange 
and  the  financing  of  our  overseas  commerce  is  something 
that  the  great  majority  of  our  bankers  know  little  or 
nothing  about,  it  is  out  of  the  question  that  we  should 
assume  London's  position  in  the  financing  of  inter- 
national trade.  As  long  as  "  acceptance  "  facilities  are 
extended  by  only  a  relatively  few  banks  (and  by  them  in 
a  very  cautious  and  constrained  manner),  it  is  impossible 
for  a  discount  market  on  any  really  broad  scale  to  be 
developed.  And,  as  explained  in  Chapter  III,  the  neces- 
sity of  a  broad  discount  at  any  given  point  is  absolute  if 
long  drafts  in  any  quantity  are  to  be  drawn  on  that  point. 
There  is  no  sense  in  sending  out  an  authorization  to 
some  merchant  in  the  Far  East  to  draw  long  drafts  unless 
he  can  immediately  and  at  a  close  rate  of  exchange  sell 
those  long  drafts  for  local  currency.  And  that,  in  the 
case  of  long  drafts  drawn  in  dollars,  he  cannot  do,  — 
except  at  certain  points  where  American  banks  have 
recently  established   branches  and  are  making  heroic 


n8         FOREIGN  EXCHANGE  EXPLAINED 

efforts  to  establish  close  foreign  exchange  relationships 
with  the  United  States. 

How  the  Shipper  Uses  the  Credit.  —  We  will  assume, 
then,  that  in  this  particular  transaction  we  have  chosen 
as  most  illustrative  of  the  business,  the  exporter  of  the 
shellac  out  in  Calcutta  has  received  his  authorization  to 
draw  on  London  —  either  the  actual  letter  of  credit  itself 
or  the  cabled  confirmation  that  it  has  been  issued  and  is 
on  the  way  —  and  is  thus  in  a  position  to  go  ahead  with 
the  shipment  of  the  goods.  The  shellac  having  been 
placed  on  shipboard,  the  steamship  company  issues  the 
bills  of  lading.  (Possession  of  the  bills  of  lading,  it  is 
to  be  noted,  virtually  constitutes  possession  of  the  mer- 
chandise.) These,  together  with  the  consular  invoice, 
the  shipper  attaches  to  his  own  draft  drawn  in  sterling 
on  the  bank  in  London  designated  by  the  credit,  for  the 
invoice  value  of  the  shellac.  In  addition  there  may  be 
attached  a  certificate  showing  where  and  how  insurance 
has  been  effected,  and  any  other  appertaining  documents 
(often  in  a  sealed  envelope)  which  the  shipper  wants  to 
get  into  the  American  importer's  hands. 

With  this  draft  and  the  documents  attached  to  it, 
and  with  his  authorization  to  draw  the  draft,  the 
Calcutta  merchant  sallies  forth  to  see  some  of  the 
banks  and  turn  the  pounds  he  has  drawn  into  rupees 
at  the  best  possible  rate.  That,  as  a  rule,  is  any- 
thing but  difficult,  particularly  where  he  can  show  a 
first-class  bankers'  credit  which  states  on  the  face  of 
it  that  drafts  drawn  thereunder  will  be  duly  honored 
on  presentation.  Nine  times  out  of  ten  it  will  be  but 
a  very  short  time  before  he  is  back  in  his  office  with 


IMPORT  AND  EXPORT  CREDITS  119 

£mt£        v  0f  ^      mo  19762S 

Wolcox.  Pbck  cfc  Hughes 

fflttS  IS  tO  <LtXX\%  That  on  the  7u>U*p  #f  day  of      *&*?  191  £ 

there  was  insured  with  ^^ 

00 

flZtf /iCUi'S&l&C*  Ootf  BALES  COTTON,  valued  at  sum  Insured,  per 
/t-/3>(2fc/  ^^0  'fo'&t  *  S/S£<&*f  at  and  from< 

It  is  hereby  understood  and  agreed  thaQin.ease  0f  loss,  such  ldss  Is  payable  to  the 
order  of    J^G'  W3  dJl£^C  onQumrender  of  this  Certificate,  which  repre- 

sents and  takes  the  place  of  the  Policy,  and  cqav<ys  all  the  rights  of  the  Original  Policy- 
holder, (for  the  purpose  of  collecting  any  cDaims  for  loss  or  damage),  as  fully  as  if  the 
property  were  covered  by  a  special  policy  cttr*5t  to  the  holder  hereof,  and  is  free  from 
any  liability  for  unpaid  premiums.  uj  2 

z 

Hot  nfld  antes  eeurttmlgned  b»  y/  Bi  Authority  of  ft#  Utan  tlirjj  laurvtoo ComoArtlaa 

Willcox.  F^ck  &  Hughes  ( r 


ountersujned 


~**  sn 


MARKS  AND   NUMBERS 
/CO 


CLAUSES 

1  (be  foil  term*  of  the  poller  in  reapeet    of   befttf  nmated    free  of    eaptnre,  eefxim 
'"op^ti/^^r^e/befor*  or   after   DtUindoo   of   War/ 


•it*    "~ 


nreption    of    rtlka   In   lb*   Uadxad    Kingdom,    ao    H»k    U  covered    hereunder   an    toot*   to   say    European   axmlrj   erMca   t» 

wr"    COTTON To    per*  particular   errraee    on    each   Un   oelea   at  If  aepentcly  tnaured.  If  amountlne.  to  lire*  per  cent.  twice*  othcrvfw 

•  need  40-1  on  ahir/menta  to  Europe  to  m;  m  damare  picking*  claim*  without  reference  (*  eerie*  or  ernounL  General  Avenn  mtf 
iut«»  OurrM  oareble  eecotdJntf  to  Tortign  Sutwot  or  per  York/Antwerp  Rule*.  if  in  accordance  will  the  eontrett  of  rjlreii bcrnem. 
mm*j£rffilB+*  risk  ^^wntry  darne««  on  ehincneut*  bum*!  hereunder  to  Europe.  Japan  Chin*.  India  or  Menu*,  eujjcci  to 
vetlenient  «t  d-iun»tj-n.  In  accordance  with  cnatoms  end  oaaeee  **  lie  P°n  ol  deatination.  onieae  otherwise  rpeciaed  In  eertineal*,  bat  n* 
euTm  for  low  of  or  damage  to  eonon  picked  or  reconditioned  is  the  United  Stale*  nor  (or  an*  owl  or  ezponae  In  reapeet  of  euch  piddarf 
or  rewr.di'i'.ninf  ehaJl  b«  reeoreraMe  hereunder.  Country  damage  U  not  covered  on  co*»  and  freight  ahipmenU  end  local  eaiaa,  not  oat 
ahiumrr't    10   MUM   U    the    United    3Utea   or    Canada   or    Mexico. 

I  INTERS    Subject  to  i%    particular  MM  on  each   hale,  bat  f*ee  fiatn  dalm   for  country  damaaav 

Cotton   pitidnea  or   frabbote,   (rea  ol   partieuJar   laerag*   unlaw   the    aeaeel    ha   •tranded.    lunb.    burned    or    to    aoOUIoav 


.      rf   hc~ea> 

itr  beuig  deemed  a  separate  Inraraacn.  Bold  cem/rid  ha  caae  off 
1  to  be  erraniod,  provided  tutJca)  he  giaeo  on  MfB "of  ■  1  ~Ti rjn 
policy,    ascent    eo    far    u    heacis    Otberarfaa    prarided, 

tUe  omi  m  mm  an 


f.-rrouc    Law»    of    Great     Itritain,    in    order    tn    collect    a    claim    under 
dpi  to  the)  United  Kiafdom. 

Insurance  Certificate 


120  FOREIGN  EXCHANGE  EXPLAINED 

the  proceeds  of  the  transaction  safely  banked  and 
ready  for  the  next  transaction. 

At  this  point  —  assuming,  of  course,  that  the  shipper 
has  drawn  his  drafts  in  conformity  with  the  terms  of  the 
credit  so  that  the  bank  in  London  can  have  no  legal  excuse 
for  refusing  to  accept  them  —  the  shipper  drops  out  of  the 
transaction.  He  has  shipped  his  goods,  drawn  his  drafts, 
and  got  his  money.  The  rate  of  exchange  at  which  the 
four  months'  sight  sterling  drafts  were  turned  into  rupees 
was,  of  course,  lower  than  if  the  drafts  had  been  drawn  at 
shorter  than  four  months'  sight,  but  that  was  something 
that  he  had  a  chance  to  allow  for  when  he  quoted  the 
price  at  which  he  was  willing  to  sell  the  shellac.  The 
American  importer  wanted  the  shipment  financed  by 
means  of  four  months' drafts  and,  as  was  right  and  proper, 
the  India  merchant  made  him  pay  for  it. 

Nothing  much  need  be  said  as  to  the  willingness  of 
the  Calcutta  banker  to  take  off  the  shellac  shipper's 
hands  the  sterling  draft  drawn  on  London.  To  do  that 
very  thing,  to  buy  and  remit  such  drafts  for  credit  of  his 
London  account  so  as  to  be  able  at  any  time  to  draw  and 
sell  his  own  drafts  in  sterling,  that  is  the  banker's  busi- 
ness. But  note  that  it  is  only  because  he  knows  there 
will  be  a  demand  for  his  own  drafts  from  parties  who  have 
payments  to  make  in  London,  that  he  is  willing  to  buy 
the  shellac  shipper's  draft.  If,  instead  of  on  London, 
the  shellac  draft  had  been  drawn  on  some  other  place, 
the  chances  are  that  the  Calcutta  banker  would  have 
politely  declined  to  buy  it,  remarking,  perhaps,  that 
while  there  could  be  no  question  as  to  its  goodness,  for 
him  to  establish  a  balance  at  a  point  on  which  he  could 


IMPORT  AND  EXPORT  CREDITS     121 

not  profitably  sell  his  own  bills  would  hardly  be  good 
business. 

The  London  Acceptance.  —  To  get  back  to  the  trans- 
action itself,  the  shellac,  we  will  say,  is  now  on  a  tramp 
steamer  ploughing  its  way  toward  New  York.  The  draft 
drawn  against  it,  on  a  fast  mail  steamer  bound  for  London, 
will,  of  course,  reach  its  destination  long  before  the  shellac 
reaches  its.  Very  likely,  while  the  Southern  Cross  still 
beams  down  on  the  tramp  steamer  carrying  the  mer- 
chandise, the  draft  will  have  been  received  by  the  Cal- 
cutta banker's  London  correspondent,  sent  around  to  the 
bank  on  which  it  was  drawn  and  accepted  by  them, 
they  of  course  retaining  the  bills  of  lading  and  other 
documents.  After  that,  in  all  probability,  the  accepted 
draft  was  discounted,  and  the  proceeds  placed  to  the 
credit  of  the  Calcutta  bank's  account. 

Here  again  it  is  worth  while  to  digress  for  a  moment 
to  note  the  source  from  which  the  Calcutta  merchant 
really  received  payment  for  his  shellac.  And  again,  as 
in  the  case  of  all  these  long  bills  we  have  been  talking 
about,  we  find  that  the  money  comes  from  the  discount 
market  in  London.  The  actual  rupees  received  by  the 
shellac  shipper,  it  is  true,  come  from  the  bank  in  Calcutta, 
but  the  only  reason  the  bank  in  Calcutta  is  willing  to 
give  up  those  rupees  is  because  it  knows  that  it  can  at 
once  get  their  equivalent  in  pounds  sterling  from  the 
discount  market  in  London.  What  really  happens, 
then,  is  that  the  shellac  shipper  gets  his  money  out  of 
the  London  discount  market,  the  Calcutta  banker  being 
actually  nothing  more  than  an  intermediary  who  makes 
the  money  transaction  possible.     In  the  last  analysis, 


122  FOREIGN  EXCHANGE  EXPLAINED 

as  the  financial  writers  love  to  say,  the  discount  market 
in  London  gives  the  Calcutta  shellac  shipper  his  money 
at  once,  being  content  to  await  reimbursement  from  New 
York  four  months  further  along. 

The  Documents  to  New  York.  —  To  return  to  our 
muttons,  the  London  bank,  having  written  its  acceptance 
across  the  face  of  the  draft  and,  in  consideration  of  its 
having  done  so,  having  been  allowed  to  detach  and  retain 
the  bills  of  lading  and  other  documents,  sends  these 
papers  by  the  first  possible  mail  to  the  bank  in  New  York 
which  originally  issued  the  credit.  Along  with  these 
documents  there  goes  a  notice  that  the  pertaining  draft 
for  so-and-so-many  pounds  sterling  has  been  presented 
and  accepted,  the  exact  due  date  being  so-and-so.  If 
the  bank  in  London  is  doing  an  active  business  in  credits 
with  its  correspondent  in  New  York,  the  chances  are  that 
the  notification  above  referred  to  will  take  the  form  of  a 
schedule  on  which  there  will  be  listed  a  large  number  of 
drafts  accepted  under  various  credits  issued.  In  the 
case  of  each  draft  there  is  specified  the  number  of  the 
credit  under  which  it  was  drawn,  the  exact  due  date,  the 
nature  and  quantity  of  the  merchandise  against  which 
the  draft  was  made,  and  any  other  relevant  details. 

A  week  or  so  later  the  bank  in  New  York  receives  the 
documents  with  the  accompanying  schedule  of  due  dates. 
Immediately  the  client  for  whose  account  the  credit  was 
issued  is  notified.  Our  correspondent  in  London,  the 
advice  in  effect  states,  has  accepted  a  draft  for  so-and-so- 
many  pounds  drawn  by  your  friends  out  in  Calcutta. 
The  due  date  on  the  draft  (four  months  and  three  days 
from  the  time  it  was  presented  in  London  for  acceptance) 


'  IMPORT  AND  EXPORT  CREDITS     123 

is  such-and-such  a  date.  Ten  days  before  that  date  we 
(the  bank  in  New  York)  look  to  you  to  furnish  us  with  a 
banker's  sterling  sight  draft  on  London  for  the  amount 
of  the  acceptance,  plus  the  commission  agreed  upon 
between  us. 

Ten  days  before  that  due  date,  and  that  due  date 
jour  months  away  —  there  is  the  heart  and  soul  of  the 
whole  transaction.  No  obligation  on  the  part  of  the 
importer,  in  other  words,  to  pay  for  the  merchandise 
until  four  months  after  it  comes  into  the  country.  Plain 
enough  now  why  the  importer  wanted  the  exporter  to 
draw  at  four  months'  sight.  The  longer  the  exporter's 
drafts  on  London,  naturally,  the  longer  the  time  in  which 
the  importer  has  to  pay  for  the  goods. 

The  Credit  Element.  —  But  at  this  point,  of  course, 
the  credit  part  of  the  transaction  begins  to  make  itself 
felt.  Up  to  now  the  banker  in  London  who  did  the 
accepting  and  the  banker  in  New  York  who  has  guaran- 
teed his  accepting  friends  abroad  that  he  will  see  that 
"  cover  "  is  provided,  have  both  been  protected  by  the 
fact  that  through  possession  of  the  bills  of  lading  the 
merchandise  itself  has  been  virtually  in  their  possession. 
Now,  the  steamer  carrying  the  shellac  having  arrived, 
the  importer  comes  around  to  the  bank  and  asks  for 
the  documents  so  that  he  can  make  entry  and  get  the 
goods.  The  banker,  in  other  words,  is  being  asked  to 
give  up  the  only  security  he  has.  If  he  does,  the  ac- 
ceptance in  London  (which  must  be  met  by  the  New 
York  banker  if  the  New  York  importer  fails  to  meet 
it)  will  assume  the  nature  of  an  unsecured  loan  to 
the  importer. 


124  FOREIGN  EXCHANGE  EXPLAINED 

What  the  banker  does  about  giving  up  possession  of  the 
merchandise  to  the  importer  depends  entirely  on  what  the 
banker  considers  the  importer's  standing  and  credit  to 
entitle  him  to.  To  one  client  he  will  turn  over  the 
documents  (the  merchandise  itself)  against  a  mere 
"  trust  receipt."  Of  another  client  he  will  demand  the 
signing  of  a  form  of  receipt  which  binds  him  more  closely 
in  the  use  he  can  make  of  the  merchandise,  and,  possibly, 
will  demand  something  in  the  way  of  tangible  collateral 
as  well.  Again,  where  he  wants  to  take  very  little 
chance  at  all,  the  banker  may  have  entry  of  the  goods 
made  himself,  put  them  in  warehouse,  and  only  parcel 
them  out  to  the  importer  on  warehouse  delivery  orders, 
as  they  are  actually  sold. 

Trust  Receipts.  —  Where  the  standing  of  the  importer 
warrants  it,  as  stated  above,  the  banker  will  deliver  him 
the  documents  upon  his  signing  a  "  trust  receipt."  Of 
this  celebrated,  and  more  or  less  useful,  kind  of  document, 
the  form  varies  greatly  but  the  purport  is  always  the 
same.  The  importer  acknowledges  having  received,  say, 
a  hundred  boxes  of  shellac  from  the  First  National  Bank 
and  agree,s  to  hold  said  goods  in  trust  for  them,  and  as 
their  property,  with  liberty  to  sell  the  same  for  their 
account  and  in  case  of  such  sale  to  hand  the  proceeds 
over  to  them.  There  then  follows,  as  a  rule,  a  sort  of  a 
waiver  of  rights  in  which  the  importer  states  that  the 
First  National  may  at  any  time  cancel  the  trust  and  take 
possession  of  the  goods  or  of  the  proceeds  of  such  of  the 
same  as  may  have  been  sold,  wherever  the  said  goods  or 
proceeds  may  then  be  found.  Furthermore,  that  in  the 
event  of  any  failure,  suspension  or  assignment  for  the 


IMPORT  AND   EXPORT   CREDITS  125 

TRUST  RECEIPT. 


Received  from  The  Guaranty  Trust  Co.  of  New  York  the  following  goods 

and  merchandise,  their  property,  specified  in  the  Bill  of  Lading  per  S.S 

Dated .- — , „ , — marked  and  numbered  as  follows: 


and,  in  consideration  thereof,  J  J  hereby  agree  to  hold  said  goods  in  trust  for 

them,  and  as  their  property,  with  liberty  to  sell  the  same  for  their  account,  and  further 
agree,  in  case  of  sale  to  hand  the  proceeds  to  them  to  apply  against  the  acceptances  of 

The  Guaranty  Trust  Co.  of  New  York  on  | j  account,  under  the  terms  of  the 

Letter  of  Credit  No. issued  for  j- -t  account  and  for  the  payment  of  any 

!mine  1 
- — -  j  to  The  Guaranty  Trust  Co.  of  New  York. 

The  Guaranty  Trust  Co.  of  New  York  may  at  any  time  cancel  this  trust  and  take 
possession  of  said  goods,  or  of  the  proceeds  of  such  of  the  same  a3  may  then  have  been  sold, 
wherever  the  said  goods  or  proceeds  may  then  be  found  and  in  the  event  of  any  suspension, 

or  failure,  or  assignment  for  the  benefit  of  creditors,  on] 1  part,  or  of  the  non-fulfill- 
ment of  any  obligation,  or  of  the  non-payment  at  maturity  of  any  acceptance  made  by 
j [  under' said  credit,  or-under  any  other  credit  issued  by  The  Guaranty  Trust  Co. 

of  New  York  on  j  — — —  J  account  or  of  any  indebtedness  on  j [  part  to  them,  all 

obligations,  acceptances,  indebtedness  and  liabilities  whatsoever  shall  thereupon  (with  or 
without  notice)  mature  and  become  due  and  payable.  The  said  goods  while  in  ]  — —  | 
hands  shall  be  fully  insured  against  loss  by  fire. 

Dated,  New  York  City 191 


(Signed).. 


£ Stg.  * 

L  Trust  Receipt  —  Regular 


126  FOREIGN  EXCHANGE  EXPLAINED 

benefit  of  creditors  all  obligations  whether  due  at  the 
time  or  not  shall  at  once  mature  and  become  payable. 

A  large  volume  could  be  written  on  the  subject  of 
trust  receipts  and  the  litigation  which  has  grown  out 
of  the  attempt  to  enforce  them,  but  the  whole  sum  and 
substance  of  it  all  would  be  that  the  trust  receipt  is  just 
about  as  good  as  the  party  who  signs  it  and  no  more. 
Bankers  who  hand  over  the  documents  on  trust  receipt 
(and  an  immense  volume  of  business  is  annually  so 
handled)  do  it  almost  entirely  on  the  standing  and 
credit  of  the  party  receiving  the  goods  and  hardly  at  all 
on  the  idea  of  being  able  to  earmark  and  recover  the 
merchandise  or  its  proceeds  in  the  event  of  failure.  Nor 
has  the  rating  of  the  importer  as  much  to  do  with  the 
banker's  being  willing  to  let  him  have  the  documents 
against  trust  receipt  as  might  perhaps  be  imagined. 
Many  a  firm  of  known  large  resources  have  trouble  getting 
the  banks  to  let  them  have  the  bills  of  lading  against  a 
straight  trust  receipt;  whereas,  many  a  firm  whose  re- 
sources are  admittedly  nowhere  near  as  large  have  no 
trouble  whatsoever.  The  importer's  business  and  par- 
ticularly the  way  he  runs  his  business  and  the  way  the 
banker  knows  he  runs  his  business  —  that  is  what  counts. 
What  it  comes  down  to  is  very  much  the  same  as  though 
the  importer  were  going  to  the  bank  and  asking  for  a 
loan.  Just  about  the  same  things  are  taken  into  con- 
sideration. 

Special  Arrangements.  —  Where  the  banker  is  not 
willing  to  let  the  importer  have  the  documents  on  trust 
receipt  the  matter  may  be  adjusted  in  any  one  of  several 
ways.    All  of  them,  however,  whatever  their  variations, 


IMPORT  AND  EXPORT  CREDITS     127 

are  based :  (1)  on  the  putting  up  of  collateral,  such  as 
stocks  and  bonds,  by  the  importer,  (2)  on  the  banker's 

BAILEE    RECEIPT. 

Krrnfob  from  the,  Guaranty  Trust  Company  of  New  York, 

solely  for  the  purpose  of  selling  same  for  account  of  said  Company: 

marked  and  numbered _^ 

and hereby  undertake  to  sell  the  property  herein  specified,  for 

account  of  the  said  Company,  and  collect  the  proceeds  of  the  sale  or  sales  thereof, 
and  deliver  the  same  immediately  on  receipt  thereof  to  the  said  Company,  to  be 

applied  to  the  credit  of __ , 

hereby  acknowledging to  be  Bailee  of  the  said  property  for  the  said 

Company,  and . do  hereby  assign  and  transfer  to  the  said  Company 

the  accounts  of  the  purchaser  or  purchasers  of  said  property-  to  the  extent  of  the 
purchase  price  thereof,  of  which  fact  notice  shall  be  given  at  the  time  of  delivery  of 

the  said  property  by to  such  purchaser  or  purchasers  and  all  invoices  therefor 

shall  have  imprinted,  written  or  stamped  thereon  by the  following : 

"Transferred  and  payable  to  GUARANTY  TRUST  COMPANY  OF  NEW 
YORK,  140  Broadway,  New  York." 

If  the  said  property  is  not  sold  and  the  proceeds  so  deposited  within  ten  days 

from  this  date, undertake  to  return  all  documents  at  once  on  demand,  or  to 

pay  the  value  of  the  goods,  at  the  Company's  option. 

The  said  goods  while  in  \  -~  [  hands  shall  be  fully  insured  against  loss  by  fire. 

The  terms  of  this  receipt  and  agreement  shall  continue  and  apply  to  the  mer- 
chandise above  referred  to  whether  or  not  control  of  the  same,  or  any  part  thereof, 
be  at  any  time  restored  to  the  Guaranty  Trust  Company  of  New  York,  and 
subsequently  delivered  to  us. 

Dated  at  New  York,     .  .   ,,191 


Bailee  Receipt  —  Form  of  Trust  Receipt  Used  Where  Accounts 
Are  Assigned 

retaining  control  of  the  merchandise  while  it  is  in  process 
of  being  sold. 


128         FOREIGN  EXCHANGE  EXPLAINED 

The  way  in  which  the  latter  is  accomplished  is  by 
having  the  banker  (usually  through  his  own  custom  house 
broker)  make  entry  of  the  goods  so  that  they  can  be 
placed  in  warehouse  in  the  banker's  name.  A  couple  of 
weeks  go  by,  and  some  varnish  factory,  we  will  say,  buys 
from  the  shellac  importer  fifty  of  the  hundred  boxes 
brought  in.  The  importer,  very  probably,  takes  the 
invoice  around  to  the  bank,  showing  that  the  sale  has 
actually  been  made  and  at  what  price,  and  asks  the 
banker  to  give  him  a  delivery  order  on  the  warehouse  so 
that  he  can  get  the  shellac  and  send  it  to  the  factory. 
The  invoice,  not  improbably,  will  direct  that  payment 
be  made  not  to  the  importer,  but  to  the  banker  direct. 
Really  what  the  importer  is  doing  in  such  a  case  is  to 
assign  over  to  the  banker  an  "  open  account,"  with 
notification  to  the  buyer  that  the  account  has  been  thus 
assigned. 

Under  such  circumstances,  it  is  plain,  the  banker  is 
taking  mighty  little  risk  when  he  hands  over  a  delivery 
order  for  the  merchandise.  The  shellac,  it  is  true, 
passes  out  of  the  banker's  possession.  But  it  doesn't 
go  into  the  possession  of  the  party  that  owes  the  money 
for  which  it  is  the  collateral  —  except,  possibly,  while  it 
is  being  taken  out  of  the  warehouse  and  shipped  to  the 
buyer.  If  the  collateral  has  passed  out  of  the  banker's 
hands,  it  has  gone  somewhere  where  it  will  turn  into 
money.  Moreover,  the  banker  holds  the  open  account, 
legally  assigned,  which  means  that  the  money  will  come 
to  him  direct  when  the  account  is  paid. 

The  above  is  one  way  in  which,  when  the  banker  who 
has  issued  a  credit  doesn't  want  to  turn  over  the  docu- 


IMPORT  AND   EXPORT  CREDITS  129 

TRUST  RECEIPT. 


(DOCUMENTS  FOR  WAREHOUSING.) 


Cfirttrrd  from  Thb  Guaranty  Trust  Co.  op  New  York  Bill  of  Lading  per. 


dated , for  the  following  good;  and  merchandise, 

their  property,  marked  and  numbered  as  follows : 


}my  ) 
^p  >  account, 

1  me  1 
the  said  Bill  of  Lading  to  be  used  by  j  "^  r  for  the  sole   purpose   of  eutering  the  above  de- 
scribed property  at  the  United  States  Custom  House  at  the  Port  of ,  and  of 

storing  the  same  in  the  name,  and  as  the  property,  of  the  said  The  Guaranty  Trust  Co.  of  New 

.     .  .  \     J     I 

York,  and  subject  only  to  their  order,  i  -^-  r  hereby  agreeing  to  so  store  the  said  property  and  to 

hand  the  storage  receipt  for  the  same  to  the  said  The  Guaranty  Trust  Co.  op  New  York, 
when  obtained. 

I  w~"  I  Atso  agree  to  fully  insure  said  property  against  fire,  the  loss,  if  any,  payable  to  said 
The  Guaranty  Trust  Co.  op  New  York,  and  to  hand  to  them  the  policies  of  insurance  thereon. 

Dated : 19 


(Signed). 


Trust  Receipt  —  Goods  to  be  Stored 


130  FOREIGN  EXCHANGE  EXPLAINED 

TRUST  RECEIPT. 


(FOR     DELIVERY    TO     PURCHASER.) 

1RCCCtt»e&  from  The  Guaranty  Trust  Co.  ot  New  York  the  following  goods  and 

merchandise,  their  property,  specified  in  the  Bill  of  Lading  per _. ,  dated 

_. . marked  and  numbered  as  follows: 


In  trust  to  deliver  the  same  to. 


who  have  purchased  the  same  for. 

payable  in  _ _ _ _ 

and  to  obtain  from  the  purchaser  the  proceeds  of  the  sale  of  the  same. 

In  consideration  of  the  delivery  of  said  goods  to  \ [  in  trust  as  above,  \ c  agree 

to  deliver  them  immediately  to  the  said  purchasers,  and  to  collect  the  proceeds  of  sale,  and  immedi- 
ately deliver  such  proceeds  to  The  Guaranty  Trust  Co.  of  Nf.w  York  in  whatever  form  collected, 
to  be  applied  by  them  against  the  acceptances  of  TheGuarantyTrustCo.  OFNEWYoRKon  \  -----  { 

account,  under  the  terms  of  Letter  of  Credit  No issued  for  \      '   \  account,  and 

<  our  ) 

to  the  payment  of  any  other  indebtedness  of  j  •      -  \  to  The  Guaranty  Trust  Co.  of  New  York 
It  is  understood,  however,  that  if  such  proceeds  be  in  notes  or  bills  receivable,  they  shall  not  be 
so  applied  until  paid,  but  with  liberty  meanwhile  to  The  Guaranty  Trust  Co.  of  New  York. 
to  sell  or  discount,  and  so  apply  net  proceeds. 

The  Guaranty  Trust  Co.  of  New  York  may  at  any  time  cancel  this  trust,  and  they  may 
take  possession  of  said  jroods  until  the  same  have  been  delivered  to  said  purchasers  and  the  proceeds 
of  sale  received  from  them,  and  thereafter  of  such  proceeds,  wherever  the  said  goods  and  proceeds 
may  then  be  found,  and  in  the  event  of  any  suspension  or  failure  or  assignment  for  the  benefit  of 
creditors  on  \  — -  >  part  or  of  the  non-fulfillment  of  any  obligation  or  of  the  non-payment  at 

maturity  of  any  acceptance  made  by  \ [  under  said  credit,  or  any  other  credit  issued  by 

The  Guaranty  Trust  Co.  of  New  York  on  \  -  --  [  account,  or  of  any  indebtedness  on  \  -  -    f 

(  our  )  '  I  our  ) 

part  to  them,  all  obligations,  acceptances,  indebtedness,  and  liabilities  whatsoever  shall  thereupon 
(with  or  without  notice)  mature  and  become  due  and  payable. 


Trust  Receipt  —  Goods  to  be  Delivered  to  Purchaser 


IMPORT  AND  EXPORT  CREDITS     131 

ments  against  a  straight  trust  receipt,  the  actual  sale 
and  delivery  of  the  goods  can  be  accomplished.  There 
are,  of  course,  all  sorts  of  other  ways  in  which  this  can 
be  done,  but  always  it  comes  back  to  the  question  of  the 
extent  to  which  the  banker  feels  his  client  is  entitled  to 
credit.  If  the  banker  knows  that  before  the  goods  ever 
were  imported  they  were  sold  or  practically  sold,  he  is 
apt  to  be  much  more  lenient  and  liberal  than  if  he  has 
reason  to  believe  that  the  goods  are  being  imported 
merely  to  be  carried  in  stock.  In  the  first  case  speedy 
liquidation  of  the  debt  is  a  practical  certainty,  whereas, 
in  the  second  case,  if  the  importer  has  not  judged  his 
market  right,  it  may  be  a  long  time  before  the  goods  can 
actually  be  disposed  of  and  turned  into  money.  No 
suggestion  is  intended  to  be  made  here  that  the  importa- 
tion, under  bankers'  credits,  of  goods,  not  already  sold  is 
not  entirely  legitimate.  But  that  the  banker  is  going  to 
be  much  easier  with  the  client  whose  goods  are  sold  in 
advance  than  with  the  client  for  whose  gopds  a  market 
must  be  found,  ought  to  be  plain  enough.  Nobody 
likes  to  see  his  money  "  turn  "  as  much  as  does  a  banker. 
Prepayments.  —  Continuing  in  our  efforts  to  hew  to 
the  line  and  follow  the  particular  and  typical  transaction 
with  which  we  started  off,  let  us  assume  that  the  shellac 
importer  got  his  documents  on  trust  receipt  and  two 
months  later  had  sold  and  received  payment  for  fifty 
of  the  hundred  cases.  This  money  being  actually  in 
his  hands  he  is,  of  course,  bound  to  turn  it  over  to  the 
banker ;  to  make  a  "  prepayment,"  as  it  were,  on  the 
acceptance  which  must  eventually  be  met.  (As  a 
matter  of  actual  practice  it  is  astonishing  how  many 


i32  FOREIGN  EXCHANGE  EXPLAINED 

importers  will  cheerfully  sign  a  trust  receipt  which 
states  that  as  soon  as  the  goods  are  sold  they  will  hand 
over  the  proceeds  to  the  banker,  and  then  will  hand  over 
nothing  until  ten  days  before  the  acceptance  is  due  in 
London.) 

Assuming  that  the  parties  of  whom  we  are  speaking 
are  not  of  that  kind  and  that,  having  received  the 
money  from  the  sale  of  the  goods,  they  are  going  to  live  up 
to  their  agreement  to  turn  it  over  to  the  banker,  the  ques- 
tion comes  up  as  to  the  form  in  which  it  is  to  be  turned 
over.  The  obligation,  it  must  be  remembered,  is  a 
pounds  sterling  one  and  not  due  for  another  couple  of 
months.  So,  if  the  importer  turns  over  to  the  New  York 
banker  the  dollars  he  has  received,  the  banker,  before 
he  sends  the  money  abroad,  will  convert  the  dollars  into 
sterling  at  a  rate  fixed  by  himself.  That,  of  course,  is 
all  right  for  the  banker,  but  not  necessarily  for  the  im- 
porter, who,  after  he  has  done  it  that  way  a  few  times, 
is  apt  to  do  the  converting  into  sterling  himself  and  send 
in,  not  dollars,  but  sight  sterling.  In  either  case, 
naturally,  the  importer,  who  is  paying  his  obligation 
away  ahead  of  time,  gets  a  rebate  of  interest  for  the  un- 
expired period.  The  rate,  as  a  general  thing,  is  fixed 
at  one  per  cent  less  than  the  Bank  of  England's  discount 
rate. 

Very  often,  where  the  prepayment  is  being  made  as 
long  a  time  as  sixty  days  ahead  of  the  due  date  of  the 
acceptance,  the  importer,  after  careful  figuring,  will 
turn  into  the  banker  neither  dollars  nor  sight  sterling, 
but  instead  a  sterling  draft  drawn  say  at  sixty  days' 
sight.     The  maturity  of  such  a  draft  coinciding  with  the 


IMPORT  AND  EXPORT  CREDITS     133 

maturity  of  the  acceptance,  the  importer  will,  of  course, 
receive  no  rebate  of  interest,  but  that  will  be  made  up  in 
the  lower  rate  of  exchange  at  which  he  can  buy  the  sixty 
days'  sight  draft  as  against  what  he  would  have  had  to 
pay  for  a  draft  at  sight.  That,  as  a  matter  of  fact,  is 
what  it  comes  down  to  —  a  lower  rate  of  exchange  if  the 
prepayment  is  made  on  one  basis,  as  against  a  rebate  of 
interest  if  it  is  made  on  another  basis.  Which  way  will 
be  chosen  —  if  the  importer  knows  this  part  of  his  busi- 
ness (which  he  mighty  seldom  does)  —  is  simply  a  matter 
of  cold  figuring.  How  can  the  remittance  be  made  at 
the  expenditure  of  the  least  dollars  and  cents?  That  is 
the  whole  question. 

Several  prepayments  have  been  made,  we  will  say, 
but  a  small  proportion  of  the  shellac  still  remains  unsold 
when  the  date  mentioned  in  the  banker's  original  advice 
as  to  when  the  payment  would  have  to  be  made  on  this 
side  rolls  around.  The  fact  that  the  goods  have  been 
sold  or  have  not  been  sold  makes  no  difference ;  payment 
in  full  has  got  to  be  made.  So,  from  the  banker  to  the 
importer  there  comes,  a  day  or  two  ahead  of  time,  a 
statement  showing  the  original  amount  of  the  accept- 
ance (with  the  commission  now  added  to  it),  the  aggre- 
gate of  the  prepayments  and  the  balance  still  due,  in 
sterling.  This  the  importer  pays  at  once  either  in  the 
form  of  a  sterling  sight  draft  which  he  goes  out  and  buys, 
or  in  dollars  at  a  rate  of  exchange  fixed  by  the  banker. 

Immediately  upon  receiving  this  money,  the  banker 
here  sends  it  over  to  his  correspondent  in  London.  And 
so,  when  a  day  or  two  after  its  arrival,  the  original  accept- 
ance comes  due  and  is  presented  for  payment,  the  London 


134  FOREIGN  EXCHANGE  EXPLAINED 

bank  has  the  funds  on  hand  to  pay  it  with.  That  closes 
the  transaction.  The  party  in  the  discount  market  in 
London  who  bought  the  Calcutta  merchant's  draft  after 
it  had  been  accepted  has  got  back  his  money ;  the  bank 
in  London  that  accepted  the  draft  has  paid  it ;  the  New 
York  importer  has  paid  for  his  goods  and  owes  his  bank 
nothing.  The  goods  have  been  bought  and  paid  for. 
The  circle  is  complete. 

Cost  of  Bankers'  Credits.  —  Now,  of  course,  the  ques- 
tion arises  at  once :  What  does  the  New  York  importer 
have  to  pay  for  all  this  service?  Without  putting  up  a 
dollar  he  not  only  had  a  valuable  shipment  of  merchan- 
dise brought  into  the  country  from  halfway  across  the 
earth,  but  he  had  four  months  in  which  to  pay  for  it. 
Is  not  the  providing  of  such  facilities  an  expensive  piece 
of  business? 

Strange  as  it  may  seem,  the  cost  of  this  sort  of 
financing,  far  from  being  high,  is  extremely  moderate, 
even  when  the  full  rate  of  commission  is  charged.  By 
the  full  rate  is  meant  the  traditional  one-quarter  of 
one  per  cent  for  each  thirty  days  that  the  drafts  run  — 
that  is  to  say,  one-half  per  cent  commission  where  drafts 
under  the  credit  are  drawn  at  sixty  days'  sight,  three- 
quarters  per  cent  commission  where  the  drafts  are  at 
ninety  days'  sight,  one  per  cent  for  four  months',  etc. 
And  seldom,  indeed,  are  these  full  rates  charged.  Almost 
invariably,  where  the  business  runs  to  any  size  at  all, 
they  are  radically  revised  downward. 

Do  you  mean  to  say,  then,  the  importer  unfamiliar  with 
the  business  almost  always  asks,  that  I  can  import 
£1000  worth  of  merchandise  under  one  of  these  credits 


IMPORT   AND   EXPORT   CREDITS  135 

and  have  four  months  in  which  to  pay  for  it,  at  a  charge 
to  me  of  only  £10?  No,  that  is  hardly  the  case.  £10, 
even  assuming  you  are  charged  the  full  rate,  measures  the 
total  visible  charge.  You  are,  however,  paying  an  in- 
visible charge,  added  by  the  seller  to  the  cost  of  the  goods 
because  you  arranged  to  have  him  draw  four  months' 
sight  drafts  on  London,  which  he  had  to  dispose  of  at  a 
considerably  lower  rate  of  exchange  than  if  he  had  been 
able  to  draw  at  sight.  Added  to  the  cost  of  the  goods,  in 
other  words,  was  the  difference  between  the  four  months' 
sight  rate  on  London  and  the  sight  rate  on  London  for 
the  whole  amount  of  sterling  involved. 

Even  at  that,  the  importer  finds  that  he  comes  out  of 
the  transaction  at  wonderfully  low  cost,  especially  when 
he  considers  the  facilities  which  have  been  extended  to 
him.  The  commission  on  this  side,  we  will  say,  was  1  % 
(less,  if  prepayments  were  made) ,  which  in  a  four  months' 
transaction  is  at  the  rate  of  only  3  %  a  year.  Added  to 
the  cost  of  the  goods  in  the  East  there  was  the  difference 
between  the  four  months'  exchange  rate  and  the  sight 
rate,  2  %  at  most,  or  at  the  rate  of  6  %  a  year.  A  charge 
of  3%  flat  (1%  commission  plus  2%  in  the  exchange 
rate)  for  having  a  shipment  of  goods  brought  ten  thou- 
sand miles,  delivered  at  your  door  and  you  given  four 
months  to  pay  for  them  —  surely  that  cannot  be  called 
other  than  extremely  moderate.  A  great  place  is  the 
London  discount  market  to  get  money  from  when  it  can 
be  arranged ! 

The  Banker's  Profit.  —  So  far  as  the  banker's  profit 
is  concerned,  that  consists  merely  of  the  commission 
charged,  plus  the  little  something  he  is  generally  able 


136  FOREIGN  EXCHANGE  EXPLAINED 

to  get  by  charging  a  full  rate  of  exchange  on  the  settle- 
ments. Unless,  indeed,  the  amounts  involved  run  into 
big  figures,  the  banker's  profits  on  this  sort  of  business 
run  surprisingly  small.  But  then,  it  must  be  re- 
membered, neither  the  banker  here  nor  the  banker 
abroad  puts  up  any  actual  money.  The  banker  here 
gets  behind  his  client,  of  course,  guaranteeing  that  the 
London  acceptance  will  be  taken  care  of,  and  the  London 
banker  does  put  his  name  on  the  drafts  when  he  accepts 
them,  but  that  is  lending  credit  and  not  money.  And 
surprising  indeed  is  the  small  money  consideration  for 
which  the  foreign  exchange  banker  will  let  the  mer- 
cantile house  make  use  of  its  credit,  always  providing, 
naturally,  that  the  merchant's  standing  warrants  the 
extension  of  such  facilities. 

That,  of  course,  is  the  secret  of  the  whole  thing  — 
the  relationship  between  the  banker  and  his  client.  If 
the  banker  doesn't  like  the  way  the  merchant  runs  his 
business,  the  merchant,  regardless  of  his  net  worth, 
will  find  the  credit  facilities  described  above  closed  to 
him.  If,  on  the  other  hand,  the  banker's  knowledge  of 
the  merchant's  affairs  leads  him  to  believe  that  the 
business,  however  small,  is  being  safely  and  conserva- 
tively conducted,  there  is  almost  no  limit  to  the  extent  to 
which  these  credit  facilities  can  be  had.  Many  a  small 
concern,  starting  out  with  small  capital  but  running  the 
business  in  the  way  the  banker  likes  to  see  it  run,  has 
been  built  up  to  great  strength  during  the  course  of  a 
very  few  years  through  enjoyment  of  the  facilities  offered 
by  bankers'  credits. 


CHAPTER  XIV 

{Continued) 

IMPORT  AND  EXPORT  CREDITS.  —  SPECIAL  FORMS 

Because  the  bankers'  credits  described  in  the  preced- 
ing chapters  are  based  on  the  importation  of  merchandise 
into  the  United  States,  the  mistake  must  not  be  made  of 
thinking  that  such  credits  are  issued  only  for  that 
purpose.  When,  indeed,  the  aforementioned  transaction 
was  chosen  for  description,  it  was  chosen  just  because 
it  did  typify  to  so  great  an  extent  the  whole  business  of 
issuing  bankers'  credits.  In  the  case  we  took,  an  Ameri- 
can importer  went  to  his  bank  and  had  a  credit  opened 
for  the  importation  of  shellac  from  India.  Just  about 
the  same  procedure  would  have  been  gone  through  by  a 
spinner  in  England  desiring  to  import  cotton  from  the 
United  States  or  by  a  merchant  in  Russia  desiring  to 
import  piece  goods  from  the  south  of  France.  The 
English  cotton  spinner,  for  example,  would  have  gone 
to  his  bank  and  asked  them  to  issue  a  credit  author- 
izing John  Jones  in  Memphis,  Tennessee,  to  draw  sterling 
drafts  on  London,  just  as  the  shellac  shipper  in  Cal- 
cutta was  authorized  to  draw  on  London.  The  drafts 
drawn  in  Memphis  would  have  found  ready  negoti- 
ation for  the  very  self-same  reason  as  the  drafts  drawn 
in   Calcutta  —  because    the    shipper    palpably    had   a 

r37 


138  FOREIGN  EXCHANGE  EXPLAINED 

right  to  draw  and  because  the  purchasing  bank  knew 
it  could  readily  discount  the  drafts  after  acceptance  and 
get  its  money  back.  When  the  documents  for  the  cotton 
reached  the  bank  in  London  which  issued  the  credit, 
exactly  the  same  questions  as  to  the  basis  on  which  the 
cotton  importer  was  to  be  allowed  to  have  the  goods 
would  have  come  up  as  came  up  in  the  case  of  the  mer- 
chant importing  shellac  into  New  York.  The  two  trans- 
actions, in  short,  run  along  side  by  side  in  all  their  essen- 
tials. Whether  the  goods  are  shellac  or  cotton  and 
whether  they  are  passing  from  Calcutta  to  New  York 
or  from  Memphis  to  Liverpool,  the  principle  holds  good 
that  the  party  who  buys  the  goods  goes  to  his  bank  and 
fixes  up  the  means  of  the  seller's  getting  paid. 

Where  Banking  Facilities  Are  Lacking.  —  The  above 
constitute  the  vast  majority  of  the  total  of  bankers' 
credits  issued,  but  there  is  another  form  of  bankers' 
credits  which  require  consideration.  Take,  for  instance, 
the  case  of  a  shipment  of  merchandise  from  New  York 
to  some  place  in  South  America  or  Oceania  where  there 
is  no  bank  to  which  the  importer  can  go  and  fix  up  a 
credit  in  favor  of  the  American  shipper.  That  means 
just  one  thing  —  that  the  exporter,  if  the  business  is  to 
be  done,  must  arrange  the  credit  himself. 

Why,  it  may  be  asked,  is  it  necessary  in  such  a  case 
for  a  bankers'  credit  to  be  issued  at  all?  Why  doesn't 
the  exporter  just  draw  a  draft  on  the  party  abroad  to 
whom  he  has  sold  the  goods  and  then  sell  the  draft  in  the 
foreign  exchange  market? 

A  natural  enough  query,  but  evidently  not  pro- 
pounded by  any  one  who  has  ever  tried  it.     A  draft 


IMPORT  AND  EXPORT  CREDITS     139 

drawn  against  a  shipment  of  copper  to  England  —  yes, 
that  can  be  sold,  even  without  any  banker's  authoriza- 
tion to  draw.  But  a  draft  drawn  against  a  shipment  of 
alarm  clocks  to  Apia  or  a  shipment  of  safety  razors 
to  Rangoon  —  try  and  sell  such  a  draft  sometime  and 
see  what  you  can  get  for  it.  Very  glad,  indeed,  to  take 
it  "  for  collection,"  the  bank  says,  proceeds  to  be 
credited  to  your  account  when  received  by  us,  but  cash 
for  the  draft  —  hardly. 

Seller  Secures  His  Own  Authorization.  —  So,  in  a 
case  like  that,  the  exporter  is  likely  to  go  to  his  bank  and 
ask  that  an  export  credit  be  issued  him  —  that  he  be 
authorized,  in  other  words,  to  draw  some  kind  of  a  draft 
that  he  can  turn  into  dollars  and  cents  without  waiting 
two  or  three  months  until  it  can  be  collected  and  the 
proceeds  returned.  But  why,  it  may  be  asked,  why 
should  the  exporter  be  authorized  to  draw  on  anybody  ? 
Why  doesn't  the  bank  just  advance  him  the  money  and 
be  done  with  it?  Simply  because  of  the  ancient  and 
honorable  reason  that  where  a  bank  can  make  money  by 
lending  its  credit  instead  of  its  money,  it  will  always  do 
so.  And  here  is  an  ideal  case  where  that  can  be  done. 
Instead  of  an  actual  cashier's  check  being  handed  over  to 
the  shipper  he  can  be  given  a  letter  of  credit  authorizing 
him  to  draw  drafts,  say  at  ninety  days'  sight,  either  in 
dollars  on  the  American  bank  itself  or  in  pounds  on  the 
American  bank's  London  correspondent.  Having  that 
authorization,  the  shipper  can  draw  and  get  his  money, 
without  the  bank's  having  to  do  anything  more  than 
accept  a  time  draft  in  dollars  or  have  its  London  corre- 
spondent accept  a  time  draft  in  sterling. 


i4o  FOREIGN  EXCHANGE  EXPLAINED 

Until  up  to  within  a  few  years  ago,  such  credits  almost 
invariably  authorized  the  drawing  of  sterling  drafts  on 
London.  With  the  increase  in  the  "  acceptance  "  powers 
of  American  banks,  however,  it  has  come  about  that  such 
credits  are  now  to  a  large  extent  issued  in  such  a  way  as 
to  allow  the  exporter  to  draw  on  New  York  in  dollars. 
From  the  exporter's  standpoint,  the  dollar  credit  is,  of 
course,  preferable.  To  the  question  as  to  why,  then, 
these  credits  aren't  always  issued  in  dollars,  the  answer 
is  that  from  the  banker's  standpoint  the  sterling  credit 
possesses  certain  advantages.  At  a  small  additional 
cost  —  which  anyway  he  can  pass  along  to  the  exporter  — 
the  American  banker  can  earn  his  commission  without 
even  accepting  a  draft,  let  alone  putting  up  any  actual 
money.  Again,  the  shipment  may  very  possibly  be 
going  to  a  place  from  which  the  remittance  can  be 
much  more  advantageously  made  to  London  than  to 
New  York.  Fast  as  we  have  come  along  in  recent 
years,  there  are  still  places  all  over  the  earth  where 
the  pound  sterling  is  known  and  the  dollar  isn't  and 
from  which  money  can  be  sent  to  New  York  only  by 
way  of  London. 

The  Banker's  Protection.  —  The  terms  of  the  credit, 
of  course,  stipulate  that  the  banker  who  issues  it  is  to 
receive  the  bills  of  lading  representing  the  shipment, 
together  with  the  draft  (if  one  has  been  made)  on  the 
buyer.  These  documents  are  the  banker's  protection. 
As  long  as  he  —  or  his  banking  correspondent  out  at  the 
place  where  the  merchandise  was  sold  —  keeps  possession 
of  the  documents,  this  protection  remains.  And  very 
careful  indeed  will  be   the  correspondent  bank  about 


IMPORT  AND   EXPORT   CREDITS  141 

letting  the  documents  get  out  of  his  possession.  If 
he  lets  the  buyer  have  them,  it  is  certain  to  be  only 
on  such  terms  as  will  keep  his  correspondent  in  New 
York  fully  protected. 

The  goods  having  arrived,  and  payment  for  them 
having  been  made,  wholly  or  in  part,  the  next  step  is 
the  remittance  of  the  proceeds,  either  to  New  York  or 
London  according  as  the  time  drafts  drawn  under  the 
credit  by  the  American  exporter  were  drawn  in  dollars 
on  the  New  York  bank  or  in  pounds  sterling  on  its 
London  correspondent.  We  will  say  for  purpose  of 
illustration,  that  in  this  particular  case  they  were  drawn 
in  pounds,  payable  ninety  days  after  sight.  Thirty 
days  after  the  credit  is  availed  of  and  the  drafts  drawn, 
perhaps,  the  merchandise  reaches  its  South  American 
destination  and  a  few  days  later  the  importer  begins 
making  payments  on  it.  These  payments  the  South 
American  bank  converts  into  pounds  and  sends  along 
to  the  bank  in  London  on  which  the  credit  was  issued 
and  which  accepted  the  American  exporter's  ninety  days' 
sight  draft.  Before  that  draft  comes  due  and  has  to  be 
paid,  the  presumption  is,  the  London  bank  will  have 
received  remittances  aggregating  the  whole  amount  of 
the  draft  or  more,  so  that  it  will  not  have  to  put  up  any 
of  its  own  money.  The  surplus  above  the  amount  of 
the  sterling  draft  which  must  be  met  the  London  bank 
sends  back  to  its  New  York  correspondent  which,  in 
turn,  hands  it  over,  less  commission,  to  the  exporter.  If, 
as  is  usual  in  the  case  of  such  credits,  the  importer  origi- 
nally drew  for  90%  of  the  value  of  the  shipment,  the 
money  that  comes  back  to  him  via  London  and  his  own 


142  FOREIGN  EXCHANGE  EXPLAINED 

bank  represents  the  other  10%  plus  his  profit  on  the 
shipment. 

In  cases  where  the  credit  was  issued  in  dollars  instead 
of  pounds  sterling  the  remittances,  instead  of  going  to 
London,  would  come  to  New  York  and  be  held  by  the 
bank  against  its  outstanding  acceptance.  From  every 
standpoint  that  —  where  it  can  be  arranged  —  is  prefer- 
able, in  that  it  does  away  with  the  conversions  into  a 
third  currency  (sterling)  and  saves  for  the  exporter  the 
commission  which  would  otherwise  have  to  be  paid  to 
the  bank  in  London  for  accepting  the  drafts  drawn  under 
the  credit  and  for  handling  the  remittances  from  South 
America. 

Usance  of  Drafts.  —  Now,  to  look  a  little  into  the  why 
and  wherefore  of  the  above,  it  is  to  be  noted  that  the  credit 
stipulated  the  drawing  of  drafts  thereunder  having  a  long 
enough  time  to  run  so  that  the  merchandise  will  have  a 
chance  to  get  to  its  destination  and  payment  therefor  to 
be  remitted  back  to  New  York  or  London  before  the  drafts 
drawn  under  the  credit  come  due  and  have  to  be  met. 
The  bank  issuing  the  credit,  in  other  words,  while  per- 
fectly willing  to  "  accept  "  the  exporter's  draft  or  have 
its  London  correspondent  accept  it,  insists  that  it  be 
drawn  at  long  enough  sight  so  that  there  will  be  no  danger 
of  the  remittance  not  getting  back  before  the  draft  comes 
due.  The  "  usance  "  of  the  drafts  to  be  drawn  under  one 
of  these  export  credits,  then,  depends  upon  the  remoteness 
of  the  point  to  which  the  shipment  is  being  made  and  on 
the  amount  of  time  after  arrival  of  the  goods  allowed  the 
buyer  in  which  to  pay  for  them.  If  the  shipment  is  made 
to  some  near-by  point  and  the  terms  of  the  sale  call  for 


IMPORT  AND  EXPORT  CREDITS     143 

payment  upon  arrival  of  the  goods,  the  drafts  drawn 
under  the  credit  can  be  made  relatively  short.  If,  on 
the  other  hand,  the  shipment  is  made  to  some  far  distant 
point,  say  in  Polynesia,  and  the  terms  of  the  sale  allow 
the  buyer  considerable  time  in  which  to  make  payment 
for  the  goods,  the  usance  of  drafts  drawn  under  the  credit 
will  be  made  as  long  as  possible  —  ninety  days'  sight, 
perhaps,  with  the  privilege  of  one  renewal. 

So  far  as  the  banker  is  concerned,  it  makes  no  differ- 
ence to  him  at  what  usance  the  drafts  under  the  credit  are 
drawn,  except  that  he  wants  to  be  reasonably  sure  that 
their  maturity  will  not  antedate  the  receipt  of  the 
remittances.  To  the  exporter,  however,  the  usance  of 
the  drafts  does  make  a  very  great  difference.  The 
longer  they  run  the  lower  will  be  the  rate  of  exchange  at 
which  they  can  be  converted  into  dollars,  or,  if  the  credit 
is  a  dollar  one,  the  greater  will  be  the  amount  of  discount 
which  will  have  to  be  taken  off  the  face  of  the  drafts. 
These  charges,  whatever  they  amount  to,  have  to  be 
added  to  the  price  at  which  the  goods  are  sold  —  which 
doesn't  help  in  the  competition  with  the  other  markets 
for  the  business. 

Credits  Calling  for  Cash  Payments.  —  From  the  fact 
that  the  various  credits  referred  to  above  are  all  on  the 
basis  of  the  seller  of  the  goods  drawing  a  time  draft  on 
somebody,  it  must  not  be  inferred  that  cash  credits 
are  never  issued.  Under  certain  conditions  and  in  some 
kinds  of  business,  in  fact,  the  kind  of  credit  where  the 
buyer,  through  his  own  bank,  arranges  to  have  the  seller 
paid  in  cash  as  soon  as  the  goods  are  shipped,  is  the  rule 
and  not  the  exception.     A  retailing  concern  in  Man- 


144  FOREIGN  EXCHANGE  EXPLAINED 

Chester,  for  example,  sees  the  advertisement  of  a  novelty 
manufacturing  company  in  St.  Louis.  The  English  firm 
is  interested,  but  after  correspondence  it  develops  that 
the  factory  in  St.  Louis  has  all  the  market  it  needs  for 
its  product  right  here  in  the  United  States  and  that  the 
sales-manager  doesn't  know  anything  about  foreign 
exchange  and  doesn't  care  anything  about  export  busi- 
ness anyway.  The  English  firm  is  informed,  therefore, 
that,  if  they  want  the  goods,  it  will  be  necessary  for  them 
to  fix  it  so  that  the  factory  can  get  its  money  (dollars 
and  cents,  of  course)  as  soon  as  the  goods  are  shipped. 
Of  drawing  drafts  in  pounds  or  of  drawing  time  drafts 
in  dollars  and  then  getting  them  discounted,  the  manu- 
facturing concern's  treasurer  says  he  knows  nothing. 
We'll  sell  you  the  goods  at  such  and  such  a  price,  he 
very  probably  writes ;  arrange  it  so  that  some  bank 
here  will  pay  us  cash  for  the  bills  of  lading  and  we'll  let 
the  shipment  go  forward. 

Such  a  method  of  doing  business,  as  might  be  expected, 
often  enough  results  in  the  transaction  being  called  off 
right  then  and  there,  but  in  a  good  many  cases  the  foreign 
buyer  wants  the  goods  badly  enough  to  acquiesce.  He 
goes  to  his  bank  in  Manchester,  therefore,  and  asks  that 
the  Manchester  bank's  St.  Louis  correspondent  be  in- 
structed to  pay  out  so-and-so-many  dollars  against 
presentation  of  the  bills  of  lading  showing  that  the 
shipment  has  been  started  for  Manchester.  In  that  way 
the  American  factory  will  get  what  it  is  demanding, 
immediate  cash  payment. 

The  Manchester  bank,  acting  at  the  request  of  its 
client,  instructs  the  bank  in  St.  Louis  to  inform  the 


IMPORT  AND   EXPORT  CREDITS  145 

factory  that  the  credit  has  been  opened,  and  upon 
presentation  of  the  bills  of  lading,  to  pay  out  the  specified 
amount  of  dollars.  Reimbursement  of  the  St.  Louis 
bank  will  then  be  effected  by  having  that  bank  draw  a 
draft  on  Manchester  for  enough  pounds  sterling  so  that 
that  draft,  when  sold  at  the  current  rate  for  sterling, 
will  produce  the  amount  of  dollars  and  cents  paid  out, 
plus  a  commission.  The  bills  of  lading  will  at  once  be 
forwarded  to  the  bank  in  Manchester  which  opened  the 
credit. 

The  sterling  draft  on  the  Manchester  bank  having  been 
presented  and  paid  and  the  American  bills  of  lading 
having  been  received  by  the  bank  (sometimes  they  are 
attached  to  the  draft,  sometimes  not),  the  bank  advises 
its  client  to  come  around  and  take  up  the  documents. 
This  the  client  does  by  paying  to  the  bank  the  amount  of 
the  draft  just  paid  by  the  bank,  plus  the  bank's  commis- 
sion. If  the  client  acts  promptly  in  taking  up  his  docu- 
ments, there  is  no  interest  to  be  paid.  The  interest, 
of  course,  is  taken  care  of  in  the  rate  of  exchange  at 
which  the  St.  Louis  bank  converted  into  pounds  the 
dollars  it  paid  out  to  the  manufacturer. 

Reimbursement  of  the  St.  Louis  bank,  in  the  above 
case,  was  by  means  of  a  sterling  draft  drawn  on  Man- 
chester. That,  while  the  customary,  is  by  no  means  the 
invariable,  practice.  In  many  cases,  instead  of  the 
American  bank  drawing  in  sterling,  the  Manchester 
bank  would  send  over  a  dollar  draft  to  its  St.  Louis 
correspondent.  This  draft  would  be  for  the  invoice 
amount  of  the  shipment,  plus  interest  from  the  time  the 
St.  Louis  bank  paid  out  the  money  until  its  reimburse- 


i46  FOREIGN  EXCHANGE  EXPLAINED 

ment  through  receipt  of  the  dollar  draft,  plus  the  St. 
Louis  bank's  commission.  This  amount  converted  into 
sterling  at  the  current  rate,  plus  the  Manchester  bank's 
commission,  is  what  the  Manchester  importer  would  have 
to  pay. 


CHAPTER  XV 

DOLLAR  CREDITS 

Because  in  the  typical  transaction  described  in  the 
previous  chapter  the  bankers'  credit  was  issued  on 
London  in  sterling,  it  must  not  be  thought  that  such 
credits  are  not  issued  on  a  large  scale  in  other  currencies, 
including  dollars.  As  a  matter  of  fact,  while  London's 
supremacy  in  the  financing  of  international  trade  re- 
mains unshaken,  the  past  few  years  have  seen  a  tre- 
mendous increase  in  the  financing  of  American  overseas 
trade  by  means  of  dollar  credits.  And  to  whatever 
extent  this  may  be  due  to  the  strain  put  upon  the  English 
money  market  from  other  directions,  it  is  a  practical 
certainty  that  a  good  proportion  of  the  new-born  dollar 
credit  business  is  going  to  stick. 

If,  in  the  credit  transaction  we  were  talking  about, 
we  substitute  New  York  for  London,  the  dollar  for  the 
pound  sterling,  and  some  city  say  in  South  America  for 
Calcutta,  we  will  have  before  us  a  fairly  typical  dollar 
credit  transaction.  The  underlying  principles  are  ex- 
actly the  same.  Coffee,  we  will  say,  is  being  imported 
from  Rio  Janeiro,  and  just  as  in  the  other  case,  the 
problem  is  to  provide  the  shipper  w  th  the  best  and  most 
economical  means  of  getting  his  money.  The  Calcutta 
shipper  wanted   to  get   the  greatest   possible  number 


148  FOREIGN  EXCHANGE  EXPLAINED 

of  rupees  for  his  shipment ;   the  Brazilian  shipper  wants 
to  get  the  greatest  possible  number  of  milreis.     Neither 

Credit  No.  1QPQ1. 


*-,«  «™  n  «  n  Guaranty  Trust  Company  of  New  York 

Foreign  Department 

New  York,  foroh  ??l 19U5l__ 

Chlno-Bneslan  Export  Corporation, 

Shanghai . 

Gentlemen : 

We  hereby  authorize  you  to  value  on  Guaranty  Trust  Company  of  New  York,  New  York, 
for  account  nf         American  Import  Company,   Sew  York 


up  to  an  aggregate  amount  of_ 


Ten  thousand  Dollars  U.   3.  0. 


available  by  your  drafU  «t        Four   (4>   aon*hs  sight 
against  shipment  of  Rfw  S1lk 


Tr-p.r-n^,   &  War  Rlsk  effeetad  In  Mew  York. 

Bills  of  Lading  for  such  shipments  must  be  made  out  to  the  order  of  the  Guaranty  Trust  Company 
of  New  York,  unless  otherwise  specified  in  this  credit 

CONSULAR  INVOICE  AND  ONE  BILL  OF  LADING  MOST  BE  SENT  BY  THE  BANK  OR  BANKER  NEGOTIATINO 
DRAFTS,  DIRECT  TO  GUARANTY  TRUST  COMPANY  OF  NEW  YORK.  NEW  YORK. 

The  remaining  documents  must  accompany  the  drafts  drawD  on  Guaranty  Trust  Company  of  New  York, 
New  York. 

The  amount  of  each  draft  negotiated  together  with  date  of  negotiation,  must  be  endorsed  on 
back  hereof. 

We  hereby  agree  with  bona  fide  holders  that  all  drafts  drawn  by  virtue  of  this  Credit,  and  In 
accordance  with  the  above  stipulated  terms,  shall  meet  with  due  honor  upon  presentation  at  the  Office  of 
Guaranty  Trust  Company  of  New  York,  New  York,  if  drawn  and  negotiated  prior  tn        une  •*■».  J-9-*-' 


Guaranty  Trust  Company  of  New  York, 


^ 


N.  B.  Drafts  drawn  under  this  Credit  must  state 
that  tbey   are    "drawn  under   Letter  of 

Credit  No-iPOO!. 

Dated      March  30,   1916  .. 

Commercial  Letter  of  Credit  —  Dollars 

cares  in  the  slightest  how  he  gets  them  —  whether  he 
is  directed  to  draw  on  London  in  pounds  or  on  New  York 
in  dollars  or  on  Kamchatka  in  kopecks.     All  he  wants 


DOLLAR  CREDITS  149 

to  be  sure  of  is  that  the  method  provided  for  his  getting 
paid  insures  his  getting  the  greatest  possible  amount  of 
his  own  local  currency. 


TOTH* 

GUARANTY  TRUST  COMPANY  OF  NEW  YORK 

Gbxtleuhnj 

Having  received  from  you  the  Letter  of  Credit  on ..account  of  which  a  true  copy  b  on  the  other 

tide,  1,  hereby  agree  to  its  terms,  and  in  consideration  thereof  i%  agree  with  you  to  provide  in  New  York,  one 
day  previous  to  the  Maturity  of  the  Bills  drawn  in  virtue  thereof,  sufficient  funds  in  cash,  to  meet  the  payment 

of  the  same  with per  cent,  commission,  and  J,  undertake  to  insure  at  ™JJ  expense,  for  your 

benefit,  against  risk  of  Fire*  or  Sea,  all  property  purchased  or  shipped  pursuant  to  said  Letter  of  Credit,  in  Com- 
panies satisfactory  to  you. 

w,  agree  that  the  title  to  all  property  which  shall  be  purchased  or  shipped  under  the  said  credit,  the  bills  of 
lading  thereof,  the  policies  of  insurance  thereon  and  the  whole  of  the  proceeds  thereof,  shall  be  and  remain  in 
you  until  the  payment  of  the  bills  referred  to  and  of  all  sums  that  may  be  due  or  that  may  become  due  on  said 
bills  or  otherwise,  and  until  the  payment  of  any  and  all  other  indebtedness  and  liability  now  existing  or  now  or 
hereafter  created  or  Incurred  by  "to  you  on  any  and  all  other  transactions  now  or  hereafter  had  with  you,  with 
authority  to  take  possession  of  the  same  and  to  dispose  thereof  at  your  discretion  for  your  reimbursement  as 
aforesaid,  at  public  or  private  sale,  without  drmand  or  notice,  and  to  charge  all  expenses,  including  commission 
for  tale  and  guarantee. 

Should  the  market  value  of  said  merchandise  in  New  York,  cither  before  or  after  its  arrival,  fall  so  that  the 
net  proceeds  thereof  (all  expenses,  freight*  duties,  etc..  being  deducted)  would  be  insufficient  to  cover  your  advances 
thereagainst  with  commission  and  interest,  j«  further  agree  to  give  you  on  demand  any  further  security  you  may 
require,  and  in  default  thereof  you  shall  be  entitled  to  sell  said  merchandise  forthwith,  or  to  sell  "to  arrive,"  irrespec- 
tfv»  of  the  maturity  of  the  acceptances  under  this  Credit.  J.  being  held  responsible  to  you  for  any  deficit,  which  J, 
bind  and  oblige  0^2w«  to  pay  you  in  cash  on  demand. 

In  case  J,  should  hereafter  desire  to  have  this  credit  confirmed,  altered  or  extended  by  cable  (which  will 
be  at  TZ  expense  and  risk).  J,  hereby  agree  to  hold  you  harmless  and  free  from  responsibility  from  errors  in  cabling, 
whether  on  the  part  of  yourselves  or  your  Agents,  here  or  elsewhere,  or  oo  the  part  of  the  cable  companies. 

This  obligation  is  to  continue  in  force,  and  to  be  applicable  to  all  transactions,  notwithstanding  any  change 
In  the  composition  of  the  firm  or  firms,  parties  to  this  contract  or  in  the  user  of  this  credit,  whether  such  change 
thai)  arise  from  the  accession  of  one  or  more  new  partners,  or  from  the  death  or  secession  of  any  partner  or  partners. 

It  is  understood  and  agreed  that  if  the  documents  representing  the  property  for  which  the  said  Credit  has 
Wen  issued  are  surrendered  under  a  trust  receipt,  collateral  security  satisfactory  to  the  Trust  Company,  such  as 
stocks,  bonds,  warehouse  receipts  or  other  security,  shall  be  given  to  the  Trust  Company,  to  be  held  until  the 
terms  of  the  credit  have  been  fully  satisfied  and  subject  in  every  respect  to  the  conditions  of  this  agreement. 

It  is  further  understood  and, agreed  in  the  event  of  any  suspension,  or  failure,  or  assignment  for  the  benefit 
of  creditors  on  ?Jt  part,  or  of  the  nonpayment  at  maturity  of  any  acceptance  made  by  ^T.  or  of  the  nonfulfillment 
•f  any  obligation  under- said  credit  or  under  any  other  credit  issued  by  The  Guaranty  Trust  Company  of  New 
York  oq  tZ  account,  or  of  any  indebtednessar  liability  on  ™Jr  part  to  you,  all  obligations,  acceptances, indebtedness 
and  liabilities  whatsoever  shall  thereuponrat  your  option  then  or  thereafter  exercised,  without  notice,  mature 
end  become  due  and  payable.         4tv 

It  is  understood  and  agreed  tha^ou  *hari  not  be  held  responsible  for  the  correctness  or  validity  of  the  docu- 
OMftU  representing  shipment  or  shipments,  nor  for  the  description,  quantities,  quality  or  value  of  the  merchandise 
declared  therein-  A 

Agreement  Signed  by  Importer  —  Dollar  Credit 

So  that  if  at  Rio  Janeiro  or  Bahia  or  Santiago  it 
happens  that  a  time  draft  drawn  in  dollars  on  New 
York  can  be  as  advantageously  disposed  of  as  a  time 
draft  drawn  in  sterling  on  London,  there  is  absolutely 
no  reason  why  the  bankers'  credit  should  not  be  arranged 
that  way.    There  are,  as  a  matter  of  fact,  important 


ISO  FOREIGN  EXCHANGE  EXPLAINED 

advantages  to  be  gained  if  it  can  be  so  arranged.  By 
cutting  London  out  of  the  transaction,  in  the  first  place, 
the  conversions  from  one  money  to  another  (always 
relatively  expensive  to  somebody)  are  reduced  merely 
to  the  conversion  of  the  draft  drawn  in  dollars  on  New 
York  into  milreis  or  whatever  the  local  currency  may  be. 
In  the  second  place  the  New  York  bank  is  freer  to  go 
ahead  and  issue  such  credits  as  it  sees  fit  without  having 
to  consider  what  its  London  correspondent  will  think, 
in  addition  to  which  the  commission  paid  the  London 
banker  will  be  saved.  Thirdly,  by  having  the  bills  of 
lading  come  direct  to  New  York  instead  of  their  having 
to  go  first  to  London,  there  is  saved  the  delay  and  ex- 
pense incident  to  the  possible  arrival  in  New  York  of 
the  goods  themselves  ahead  of  the  documents. 

Eliminating  Exchange  Conversions.  —  Of  these  various 
considerations  the  one  having  to  do  with  the  rates  of 
exchange  is  far  and  away  the  most  important.  One 
conversion  of  the  draft  drawn,  into  the  local  currency, 
must  of  course  be  made.  But  after  that  has  been  made, 
the  foreign  exchange  element  goes  out  of  the  transaction 
entirely  and  it  becomes  a  matter  of  dollars  pure  and 
simple.  The  American  merchant,  as  a  matter  of  fact, 
has  nothing  to  do  with  the  foreign  exchange  end  of  it 
whatever.  The  drafts  drawn  by  the  shipper  are  in 
dollars  and  it  is  in  dollars  that  the  importer  has  to  make 
his  settlements.  That,  to  the  average  American,  whose 
knowledge  of  foreign  exchange  is,  to  put  it  mildly,  limited, 
is  a  very  great  advantage  indeed.  However  great  the 
confidence  he  may  have  in  his  banker,  he  cannot  get 
away  from  the  feeling,  when  the  settlements  are  made 


DOLLAR  CREDITS  151 

in  some  mysterious  currency  like  sterling  or  francs, 
that  somebody  is  taking  advantage  of  him.  Dollars, 
on  the  other  hands,  are  something  he  knows  about  and 
understands  —  naturally  enough,  considering  that  they 
are  generally  his  life  and  soul. 

Freer  Issue  and  Saving  of  Commissions.  —  Secondly, 
it  is  a  great  thing  to  have  London  out  of  the  transaction 
and  the  bank  here  free  to  grant  credits  "  when  as  and  if  " 
it  sees  fit.  Where  the  credits  are  issued  on  London, 
however  close  the  relationship  between  the  issuing  bank 
here  and  the  accepting  bank  abroad,  the  bank  abroad  is 
bound  to  exercise  a  certain  amount  of  supervision 
over  the  business.  The  accepting  bank  is,  of  course, 
guaranteed  by  the  American  bank ;  but  even  so,  where 
the  business  runs  into  big  figures  as  it  so  often  does, 
it  is  only  natural  that  the  bank  abroad  should  want 
to  know  just  what  it  is  handling.  Which,  of  course, 
acts  as  more  or  less  of  a  restriction  on  the  credits  the 
American  bank  may  want  to  grant. 

Again,  there  is  the  matter  of  commissions.  The  Lon- 
don bank,  as  may  be  imagined,  does  not  do  the  accept- 
ing of  the  drafts  and  the  handling  of  the  documents 
for  nothing.  The  charge  it  makes  it  passes  along  to 
the  bank  in  New  York,  which  of  course  passes  it  along 
to  its  client,  including  it  in  the  commission  the  client 
has  to  pay.  When  London  is  cut  out  of  the  transaction 
all  that  is  saved,  and  the  commission  charged  the  im- 
porter can  be  made  correspondingly  lower.  Can  be; 
sometimes  it  is,  and  sometimes  it  isn't. 

Operation  of  Credit  Facilitated.  —  Then,  in  the  third 
place,  when  London  is  left  out  of  the  transaction,  the 


152 


FOREIGN  EXCHANGE  EXPLAINED 


handling  of  the  bills  of  lading  is  made  much  cleaner  and 
easier.  Generally  when  a  bank  in  London  "  accepts  " 
under  a  bankers'  credit,  it  demands  that  all  the  bills 
of  lading  shall  accompany  the  draft,  virtual  possession 
of  the  merchandise  being  thus  assured.  All  very  well 
as  long  as  the  merchandise  is  on  a  slow  steamer  while 
the  bills  of  lading  are  on  a  fast  one  and  so  pass  through 
the  bank  in  London  and  reach  New  York  ahead  of  the 
goods.  But  how  about  it  (as  not  infrequently  happens) 
when  the  goods,  coming  direct,  reach  New  York  ahead 


This  tt«e«ptttfto«  I*  baaed  opoa 
trtoamrtitm  Involving  tho  Importation  or 
exportation  <rf  eocd».     OTUt\STT  TSOTT  OOv 


?/srl?uata*zy  73Uc^&<»SsY*vysri*. 


Dollar  Draft  on  New  York  —  Drawn  Against  Merchandise 
Shipped  from  South  America  to  the  United  States 


of  the  papers,  coming  via  London?  That,  for  the  im- 
porter, is  an  expensive  piece  of  business  and  one  which 
he  wants  to  avoid  if  he  possibly  can.  And,  of  course, 
where  the  papers  come  direct,  it  is  avoided.  Usually, 
as  a  matter  of  fact,  the  papers  and  drafts  come  on  the 
same  steamer  as  carries  the  goods. 

The  Future  of  the  Dollar  Credit.  —  With  regard  to 
the  future  of  dollar  credits  and  the  substitution  of  New 


DOLLAR  CREDITS  153 

York  for  London  in  the  financing  of  international  trade, 
the  fact  must  not  be  lost  sight  of  that  much  of  the  rapid 
progress  made  in  the  establishing  of  the  dollar  is  directly 
attributable  to  the  financial  disturbance  abroad.  The 
whole  thing,  as  we  have  seen,  comes  down  to  the  question 
of  a  discount  market,  from  which  the  shipper  receives 
his  payment  at  once,  and  which,  in  consideration  of  a 
certain  rate  of  interest,  agrees  to  wait  two,  three,  four 
months  for  repayment.  Now  it  is  the  merchant  here 
who  pays  this  interest  and,  naturally,  he  is  interested  in 
having  it  as  low  as  possible.  Other  things  being  equal, 
it  is  purely  a  question  of  which  market  offers  the  lowest 
rate  of  interest  which  determines  whether  the  merchant 
wants  his  credit  issued  on  New  York  or  on  London.  If 
the  discount  rate  in  New  York  is  such  that,  by  having 
the  drafts  drawn  on  New  York,  less  need  be  added  to 
the  price  of  the  goods  by  the  shipper  than  if  the  drafts 
were  drawn  on  London,  the  dollar  credit  will  be  the 
form  used.  If,  on  the  other  hand,  the  London  dis- 
count market  offers  the  greater  facilities,  the  credit 
will  be  issued  in  sterling  form.  Our  discount  market 
as  against  somebody  else's  —  that  is  the  question  in 
a  nutshell. 

The  above  refers,  of  course,  to  the  general  issuing  of 
bankers'  credits  where  it  is  a  question  of  getting  the 
business  done  cheapest.  In  numerous  cases  (as,  for 
instance,  that  of  the  merchant  who  doesn't  know  any- 
thing about  foreign  exchange  and  doesn't  want  to  bother 
with  it)  there  may  be  considerations,  other  than  cheap- 
ness, which  will  bring  the  business  here  even  where  it 
might  more  properly  be  done  abroad.     That,  however, 


154  FOREIGN  EXCHANGE  EXPLAINED 

is  no  very  secure  foundation  on  which  to  build  a  per- 
manent position  as  the  world's  banker.  Making  water 
run  uphill  is  an  easy  job  compared  to  making  a  borrower 
choose  the  less  favorable  of  two  markets  in  which  to 
get  his  money. 


CHAPTER  XVI 

DOLLAR   AND  OTHER   DRAFTS   ON  FOREIGN  POINTS 

Where  no  bankers'  credit  is  provided  by  the  purchaser 
and  there  is  any  question  as  to  the  negotiability  of  a 
draft  drawn  without  such  authorization,  the  seller  of 
the  goods,  we  have  seen,  is  likely  to  get  his  own  bank  to 
give  him  an  authorization  to  draw  so  that  he  can  be 
sure  of  getting  his  money  at  once.  There  are,  however, 
cases  where  no  such  authorization  is  wanted  or  needed 
for  the  simple  reason  that  the  drawer  does  not  intend 
to  sell  his  draft  to  anybody  ("  discount  "  it)  but  prefers 
to  put  it  through  his  own  bank  for  collection,  the  proceeds 
to  be  credited  to  his  account  only  when  the  draft  has 
actually  been  collected.  As  compared  with  the  drafts 
on  foreign  countries  sold  outright  to  bankers  as  soon  as 
they  are  drawn,  the  drafts  thus  put  through  for  collection 
are  greatly  in  the  minority.  They  constitute,  neverthe- 
less, a  class  of  foreign  exchange  business  the  importance 
of  which  must  not  be  overlooked. 

The  idea  of  a  large  firm,  whose  name  alone  would  sell 
any  drafts  it  had  to  offer,  putting  through  its  drafts 
"  for  collection  "  is,  of  course,  to  save  the  discounting 
charges.  To  a  small  concern,  with  limited  capital, 
these  costs  are  a  secondary  consideration,  a  charge 
which  has  simply  got  to  be  paid.     The  big  firm,  with 

i55 


156 


FOREIGN  EXCHANGE  EXPLAINED 


more  capital  than  its  business  at  the  moment  requires 
is,  however,  likely  to  figure  that  it  might  just  as  well  use 
some  of  this  capital  collecting  its  own  drafts  and  thus 
save  the  charges. 

In  the  case  of  drafts  drawn  on  Europe,  where  the 
drawee  would  never  in  the  world  allow  interest  while 
the  draft  is  in  transit  to  be  added  to  its  face,  the  putting 
of  drafts  through  the  bank  "  for  collection  "  is  all  but 
unknown.  In  the  case  of  drafts  drawn  on  South  America 
or  Australia  or  the  Orient,  however,  the  case  is  different. 
So  long  is  the  time  needed  to  send  such  a  draft  out 


PAYABLE  witJS  vxch&nge  ana  all 

collection    clmrgsfl    plus    Ut»r«et 
th«   rata   of -it- %  per   annua 
4a to  of    Ijsu«   to    ftppraxi- 
du*  date>«t  ar^vaj  jst 

ma 


W 


m 


7flS* 


Sterling  Commercial  Draft  on  Australia  —  Drawee  Pays  Ex- 
change, Collection  Charges,  and  Interest  Both  Ways 

and  get  a  remittance  back  on  it  that  it  has  become 
almost  a  universal  practice  to  collect  interest,  from 
the  drawee,  from  the  date  the  draft  is  drawn  until 
the  proceeds  are  received  in  New  York.  And  this 
interest,  the  large  house  which  has  plenty  of  capital 
feels,  it  might  just  as  well  earn  itself  as  turn  over  to 
some  bank  which  would  be  willing  to  take  the  draft 
off  its  hands  for  cash. 


DOLLAR   AND   OTHER   DRAFTS  157 

Interest  and  Charges  Paid  by  the  Drawee.  —  This 
whole  question  of  what  the  drawee  is  to  pay  in  addition 
to  the  face  of  the  draft  is  a  matter  of  individual  arrange- 
ment between  himself  and  the  seller  of  the  goods.  If 
the  seller  is  "  easy,"  or  if  he  feels  that  he  is  getting  a 
pretty  good  price  for  his  merchandise,  he  may  consent 
to  bear  the  loss  of  interest  himself,  and  perhaps  the 
collecting  bank's  charges  as  well.  That,  however,  is 
the  exception  and  not  the  rule.  In  the  great  majority 
of  cases  the  seller  figures  that  his  money  is  tied  up  in 
the  goods  from  the  time  they  go  out  of  his  hands  till  the 
remittance  comes  back  to  him,  and  that  interest  on  the 
money  during  this  period  is  rightly  due  him.  He  is 
likely  to  insist,  therefore,  that  there  be  stamped  on  the 
draft  a  statement  to  the  effect  that  it  is  payable  at  face 
value  plus  interest  for  the  time  consumed  in  transit, 
both  ways.  (The  time  it  will  take  the  remittance  to 
get  back  has  to  be  approximated.) 

The  above  refers  only  to  the  interest  lost  while  the 
goods  are  going  out  and  the  remittance  is  coming  back. 
If  the  draft  is  a  time  draft  —  60  or  90  days  —  interest 
for  that  period  will  be  collected  from  the  drawee,  as  well. 
This  is  an  important  point  to  remember,  that  while  the 
buyer  of  goods  at  some  outlying  place  may  demand  and 
receive  60  or  90  days'  time  in  which  to  make  pay- 
ment, he  can  almost  invariably  be  made  to  pay  in- 
terest during  that  period.  In  the  case,  for  example, 
of  a  shipment  made  to  some  point  30  days  away,  the 
buyer  being  given  90  days  in  which  to  make  payment, 
there  would  be  added  to  the  face  of  the  draft  interest 
at  six  per   cent  for  two   periods  of  30    days  and  one 


158         JFOREIGN  EXCHANGE  EXPLAINED 

period  of  90  days — 150  days  in  all.  This  amount 
it  would  be  understood  that  the  collecting  bank  should 
collect  from  the  drawee. 

Payment  of  Dollar  Drafts  Made  in  Local  Currency.  — 
Drafts  of  the  class  referred  to,  it  is  to  be  noted,  are 
drawn  either  in  sterling  or  in  dollars — -generally  dollars, 
nowadays  —  regardless  of  what  currency  is  in  use  at  the 
point  drawn  on.  This,  of  course,  necessitates  the  fixing 
of  a  rate  of  exchange  at  which  the  draft  shall  be  paid 
by  the  party  on  whom  it  is  drawn.  The  South  American 
buyer,  for  example,  has  no  means  of  paying  in  dollars. 
What  he  knows  is  sucres  or  bolivianos  or  whatever  the 
local  currency  may  be,  and  in  that  he  keeps  his  accounts 
and  draws  his  checks.  Theoretically,  if  some  one 
draws  a  draft  on  him  in  American  dollars  he  can  go  out 
and  buy  a  draft  on  New  York  with  which  to  make  pay- 
ment ;  but  practically,  what  happens  is  that  he  asks 
the  bank  presenting  the  draft  drawn  on  him  in  dollars 
how  many  sucres  or  bolivianos  or  whatever  it  is  they 
will  accept  in  payment.  Payment  of  the  dollar  draft, 
in  other  words,  will  not  be  made  in  dollars,  but  in  local 
currency  at  a  rate  of  exchange. 

Now  the  South  American  bank,  it  must  be  borne  in 
mind,  must  account  for  the  draft,  to  its  American  cor- 
respondent, in  dollars  —  it  was  just  because  the  American 
shipper  didn't  want  to  have  anything  to  do  with  the 
sucres  or  bolivianos  or  milreis  that  he  insisted  on  draw- 
ing in  dollars  in  the  first  place.  The  South  American 
bank,  therefore,  must  collect  in  exchange  for  the  draft 
enough  local  currency  so  that  it  (the  bank)  can  account 
for  the  draft  in  dollars.     It  must,  to  put  it  another  way, 


DOLLAR   AND   OTHER   DRAFTS  159 

collect  an  amount  of  local  currency  sufficient  to  purchase 
the  needed  remittance  on  New  York. 

Fixing  the  Rate  of  Exchange.  —  Here,  it  is  plain, 
would  be  a  source  of  endless  controversy  if  the  rate  of 
exchange  were  not  fixed  in  advance.  The  banker 
holding  the  draft  would  inform  the  drawee  of  his  inten- 
tion to  "collect  from  him  at  a  given  rate.  The  drawee 
would  very  probably  come  back  at  the  banker  with  the 
statement  that  the  rate  quoted  was  altogether  too  high, 
and  refuse  to  pay.  It  would  then  be  a  question  as  to 
who  was  right  and  who  was  wrong  — ■  a  question  mighty 
hard  to  settle  at  some  little  point  where  exchange  is  in- 
frequently dealt  in  and  demands  for  dollar  remittances 
on  New  York  are  few  and  far  between. 

Gradually,  therefore,  it  has  come  about  that  the  rate 
of  exchange  at  which  the  draft  is  to  be  paid  is  settled 
in  advance  by  stamping  on  the  draft  itself  a  statement 
to  the  effect  that  it  is  payable  at  the  collecting  bank's 
selling  rate  for  sight  drafts  on  New  York.  The  fact 
that  it  is  the  collecting  bank's  selling  rate  does,  of  course, 
give  the  bank  considerable  leeway  in  saying  what  the 
rate  shall  be;  but  the  fact  that  the  drawee  can  easily 
enough  find  out  the  rate  at  which  the  bank  is  accom- 
modating its  other  customers  keeps  the  bank  from  fixing 
its  rate  too  high. 

From  the  standpoint  of  the  American  maker  and  of 
the  American  collecting  bank  a  draft  bearing  the  above 
clause  is  a  dollar  draft,  pure  and  simple,  and  will  be 
accounted  for  in  dollars.  The  foreign  exchange  part  of 
the  transaction  is  entirely  between  the  foreign  collect- 
ing bank  and  the  party  on  whom  the  draft  is  drawn. 


160  FOREIGN  EXCHANGE  EXPLAINED 

And  as  the  foreign  bank  collects  in  local  currency  and 
remits  back  to  the  United  States  in  dollars,  the  higher 
the  rate  of  exchange  it  can  fix,  the  greater  will  be  its 
profit.  In  no  case  can  the  bank  lose,  as  in  no  case  will 
it  accept  an  amount  of  local  currency  insufficient  to 
purchase  the  needed  dollar  draft  on  New  York. 

Where  the  Rate  Is  Fixed  in  Advance.  —  The  buyer 
of  the  goods,  it  might  be  thought,  might  object  to  such 
an  arrangement.  In  some  cases,  as  a  matter  of  fact, 
he  does.  As  a  rule,  however,  he  gets  good  treatment 
from  his  local  bank  and  is  required  to  pay  only  what 
is  a  fair  rate  of  exchange.  Sometimes,  though,  the 
buyer  does  refuse  to  do  business  under  the  usual  clause 
and  insists  that  a  definite  rate  of  exchange  be  marked 
on  the  draft  when  it  is  sent  from  the  United  States  for 
collection.  American  shippers  do  not,  however,  take 
kindly  to  that  proposition  as  it  introduces  an  element  of 
uncertainty  into  the  returns  they  are  going  to  receive. 
The  South  American  collecting  bank  has  got  to  buy  a 
dollar  remittance  on  the  United  States  with  the  local 
currency  it  collects.  That  means  that  if  the  current 
rate  happens  to  be  above  the  rate  marked  on  the  draft, 
the  remittance  in  dollars  will  be  less  than  the  face  of  the 
draft.  On  the  other  hand,  there  is,  of  course,  the  chance 
that  the  current  rate  will  be  lower  than  the  rate  marked 
on  the  draft,  in  which  case  the  local  currency  will  buy 
more  dollars  than  the  draft  called  for.  What  it  comes 
down  to  is  a  speculation  in  exchange  —  unless  the  rate 
agreed  upon  in  the  first  place  is  made  so  high  as  to  pre- 
clude any  reasonable  chance  of  the  current  rate,  at  the 
time  the  draft  is  paid,  being  higher. 


DOLLAR   AND   OTHER   DRAFTS  161 

So  far  as  collection  charges,  bill  stamps,  and  other 
incidentals  are  concerned,  these  are  generally  borne 
by  the  party  on  whom  the  draft  is  drawn.  Almost  in- 
variably there  will  be  stamped  on  the  face  of  the  draft 
a  clause  to  the  effect  that  the  draft  is  payable  at  the 
collecting  bank's  selling  rate  for  sight  drafts  on  New 
York,  plus  the  commission  for  collecting,  plus  the  bill 
stamps,  and  any  incidental  charges.  Where  the  clause 
about  the  charges  is  not  put  on  the  draft,  the  probable 
amount  of  these  charges  is  likely  to  be  included  in  the 
amount  for  which  the  draft  is  drawn.  The  theory  on 
which  the  American  seller  goes  in  a  case,  for  instance, 
where  he  has  sold  a  certain  lot  of  merchandise,  say  for 
$500,  is  that  he  wants  to  get  $500  net  out  of  the  trans- 
action. If,  in  the  process  of  collection,  the  draft  is  go- 
ing to  "  lose  weight,"  obviously  the  thing  to  do  is  to 
add  to  it  at  the  start  what  it  is  likely  to  lose.  That  can 
easily  enough  be  done  either  by  putting  on  the  draft 
the  clause  about  payment  of  charges,  etc.,  standard  for 
the  country  to  which  the  shipment  is  being  made ;  or 
by  adding  these  charges  right  into  the  amount  for 
which  the  draft  is  made  in  the  first  place.  Which  method 
is  adopted  is  simply  a  matter  of  arrangement  between 
buyer  and  seller.  To  the  banker  who  takes  the  draft 
"  for  collection  "  it  makes,  of  course,  no  difference. 


CHAPTER  XVII 

PROFIT  POSSIBILITIES   IN  FOREIGN  EXCHANGE 

It  was  with  a  cynical  smile  that  a  certain  well-known 
New  York  banker  read  the  above  caption.  "Profit 
possibilities,"  he  remarked  to  the  author,  '"Profit  Possi- 
bilities '  ?  Why  not  call  it '  Loss  Possibilities  '  ?  The  es- 
tablishment of  a  foreign  exchange  department  was  the 
most  expensive  thing  in  its  line  this  bank  ever  did.  We 
closed  it  out  after  we  sold  at  somewhere  around  $4.80 
a  big  balance  in  London  that  it  cost  us  $4.86  to  put 
over  there." 

That  kind  of  possibility  —  of  profit  or  of  loss  —  it 
is  not  our  purpose  to  discuss.  Speculation  in  foreign 
exchange  like  speculation  in  stocks  or  commodities  or 
anything  else  is  very  different  from  "  dealing."  Any- 
thing that  fluctuates  in  value  lends  itself  to  speculation. 
A  bank  or  an  individual  can  speculate  in  government 
bonds  or  in  foreign  exchange  but  that  does  not  prove 
that  the  business  of  dealing  in  government  bonds  or  in 
foreign  exchange  is  essentially  a  speculative  proposition. 
Everything  depends  on  the  way  the  business  is  done. 

It  would  be  entirely  outside  the  purview  of  a  work  of 
this  kind  to  attempt  to  say  what  is  legitimate  and  what 
is  non-legitimate  speculation  in  foreign  exchange.  Neces- 
sarily and  of  reason  we  must  confine  our  discussion  to 

162 


PROFIT  POSSIBILITIES  163 

the  business  and  profit  possibilities  of  dealing  in  ex- 
change, not  of  speculating  in  it. 

The  primary  business  of  the  foreign  exchange  banker, 
as  was  pointed  out  in  Chapter  I,  is  to  purchase,  at  a 
price,  all  bills  of  exchange  deemed  safe  by  him  that  are 
offered  to  him,  drawing  and  selling  at  a  profit  his  own 
drafts  on  the  balances  abroad  thus  created.  To  get  it 
into  its  most  elementary  form,  if  a  banker  can  buy  a 
sight  draft  in  London,  say  for  £1000,  at  a  total  outlay 
in  dollars  in  New  York  of  $4860,  can  send  it  over  there 
for  credit  of  his  account  and  then  draw  his  own  draft 
for  £1000  and  sell  it  for  $4870,  it  is  plain  that  he  has 
made  $10  gross  on  the  transaction.  Foreign  exchange 
operations  are  not  as  a  rule,  it  must  be  admitted,  as  simple 
as  that,  but  the  theory  is  always  the  same  —  that  is  to 
say,  the  putting  of  balances  at  foreign  points  at  an  ex- 
penditure of  less  dollars  than  those  balances  can  be  im- 
mediately sold  out  for.  Immediately,  because  any  delay 
whatsoever  means  the  introduction  of  a  speculative 
element.  The  banker  who  buys  bills  without  being  sure 
that  he  can  simultaneously  sell  his  own  bills  at  a  price 
to  show  him  a  profit,  is  taking  a  chance. 

Selling  Cables  Against  Cables,  Demand  Against  De- 
mand, etc.  —  Broadly  speaking,  the  business  of  dealing 
in  bills  may  be  divided  into  two  classes  :  (1)  that  of  sell- 
ing demand  bills  against  demand  bills,  long  bills  against 
long  bills,  etc.,  and  (2)  that  of  selling  one  kind  of  ex- 
change against  another,  as,  for  instance,  demand  bills 
against  remittances  of  long  bills. 

To  take  the  first  class  —  cables  are  almost  never 
sold  against  cables  for  the  simple  reason  that  it  is  but 


164  FOREIGN  EXCHANGE  EXPLAINED 

rarely  that  any  money  can  be  made  out  of  such  an  opera- 
tion. A  cable,  as  has  been  explained,  is  a  standard 
form  of  remittance,  issued  almost  invariably  by  bankers 
and,  so,  devoid  of  any  element  of  credit.  One  bank's 
cable,  in  other  words,  is  just  as  good  as  another's.  The 
opportunity,  therefore,  of  being  able  to  buy  a  cable  for 
any  considerable  amount  less  than  you  can  sell  your  own 
for,  is  almost  never  presented.  Once  in  a  while  in  excited 
markets  it  happens  that  a  cable  can  be  picked  up  at  a 
price  which  makes  possible  the  sale  against  it  of  your 
own  cable,  but  even  then  the  profit  is  apt  to  run  only 
five  or  ten  points.  Five  or  ten  dollars  on  a  £10,000 
transaction  is  a  small  amount  to  go  after  even  in  these 
days  of  short  profits. 

Selling  bankers'  checks  against  bankers'  checks  is, 
like  selling  cables  against  cables,  a  nice  safe  form  of 
business  but  one  out  of  which  it  is  next  to  impossible 
to  make  any  money.  As  with  cables,  there  come  times 
when  possibly  as  much  as  ten  points  can  be  made  by 
selling  your  own  check  against  some  one  else's,  but  such 
occasions  are  few  and  far  between.  In  spite  of  the  fact 
that  foreign  exchange  quotations  are  established  by  direct 
dealings  between  a  large  number  of  banks  and  that 
there  is  no  one  central  point  at  which  they  are  registered, 
quotations  rise  and  fall  with  quite  remarkable  evenness. 

The  Element  of  Credit.  —  Where  it  comes  to  selling 
bankers'  demand  bills  against  commercial  demand  bills, 
however,  the  case  is  different.  The  element  of  credit 
does  not,  it  is  true,  enter  into  the  market  price  of  a  com- 
mercial bill  payable  at  sight  to  the  same  extent  as  it 
enters  into  the  market  price  of  a  commercial  bill  payable 


PROFIT   POSSIBILITIES  165 

at  the  end  of  sixty  or  ninety  days,  but  is  a  factor  never- 
theless. John  Smith's  bill  drawn  at  sight  against  a 
shipment  of  meat  may  not,  probably  will  not,  sell  at  the 
same  price  as  John  Jones'  bill  drawn  against  a  shipment 
of  cotton.  John  Smith  and  John  Jones  may  both  be 
perfectly  reliable  parties  but  the  exchange  market  will 
not  hesitate  to  set  its  own  valuation  on  each  of  the  two 
bills.  Smith's  credit  or  Jones'  credit,  it  must  be  re- 
membered, is  not  the  only  thing  that  counts.  There 
must  be  considered,  as  well,  the  respective  standing 
of  the  parties  on  whom  the  bills  are  drawn  and,  after 
that,  the  relative  marketability  of  the  goods  against 
which  the  drafts  are  drawn.  Cotton,  for  instance, 
which  won't  spoil,  is  a  whole  lot  better  form  of  collateral 
than  meat,  which  will. 

So  that,  when  we  consider  this  question  of  making 
a  profit  out  of  selling  bankers'  sight  bills  against  commer- 
cial sight  bills,  the  amount  of  profit  we  are  going  to 
make  depends  upon  the  amount  of  risk  we  are  going  to 
take.  Here  is  a  bill  drawn  by  J.  Robinson,  we  will  say, 
said  Robinson  being  an  exporter  of  the  highest  standing, 
and  the  goods  he  is  sending  out  being  of  the  most  staple 
kind.  Now  that  bill,  very  likely,  will  command  a  price 
only  a  little  less  than  what  you,  a  banker,  can  sell  your 
own  bill  for.  But  wait ;  here  is  a  bill  drawn  by  J.  Doe, 
who,  as  it  happens,  is  one  of  your  depositors.  Doe 
hasn't  the  resources  of  Robinson  and  isn't  nearly  as  well 
known,  but  his  bill,  you,  as  his  banker,  know,  is  as  good 
as  gold.  You  know  it,  perhaps,  but  the  exchange 
market  doesn't  know  it  and  so  when  Doe's  bill  is  offered 
for  sale  it  commands  a  price  considerably  —  half  a  cent 


166  FOREIGN   EXCHANGE  EXPLAINED 

in  the  pound,  perhaps  —  less  than  Robinson's.  You, 
knowing  what  you  do,  could  buy  that  bill  of  Doe's  and 
sell  your  own  check  against  it  and  make  money  out  of  it 
and  really  be  taking  no  greater  risk  than  if  you  bought 
Robinson's  bill. 

How  Bills  Vary  in  Price.  —  Credit  knowledge  —  knowl- 
edge that  is  more  complete  and  accurate  than  the  knowl- 
edge on  which  the  general  market  bases  its  estimate 
as  to  the  value  of  a  bill  —  that  is  what  is  essential  to  the 
conduct  of  this  business,  if,  indeed,  it  is  to  be  conducted 
in  such  a  way  as  to  be  really  profitable  as  well  as  safe. 
Every  day,  among  the  great  mass  of  commercial  bills 
offered  for  sale,  there  are  offerings  that  are  real  bargains, 
that  present  the  opportunity  to  make  a  worthwhile 
profit  without  taking  more  than  a  legitimate  degree  of 
risk.  To  be  able  to  recognize  these  opportunities  for 
what  they  are  is  to  be  able  to  make,  and  with  safety,  any- 
where up  to  a  cent  on  the  pound  profit. 

Selling  bankers'  long  bills  against  bankers'  long  bills, 
like  selling  bankers'  short  against  bankers'  short,  is  all 
right  where  you  can  do  it,  but  not  usually  a  source  of 
substantial  profit.  In  the  case  of  some  bankers'  long 
bills,  though,  as  has  been  explained,  the  element  of 
credit  does  enter,  at  least  to  a  moderate  degree,  making 
it  possible  at  times  to  buy  bills  that  are  perfectly  good 
at  somewhat  below  the  market.  The  fifteen  or  twenty 
points  (fifteen  to  twenty  hundredths  of  a  cent  per  pound 
sterling)  that  can  be  made  out  of  this  business  is,  how- 
ever, hardly  fair  compensation  for  having  to  put  your 
own  long  bills  on  the  market  and  having  to  hold,  un- 
discounted,  the  long  bills  purchased. 


PROFIT   POSSIBILITIES  167 

Where  long  bills  are  sold,  not  against  other  bankers' 
long  bills  but  against  long  bills  drawn  by  merchants, 
profit  possibilities  are  much  greater.  In  the  commercial 
long  bill  the  credit  element  finds  reflection  to  the  greatest 
possible  extent  and  great  is  the  variance  in  price  at 
which  such  bills  sell.  Smith's  bill  and  Jones'  bill,  each 
at  sixty  days'  sight,  may  both  be  good,  but  if  the  market 
happens  to  like  Smith  better  than  Jones,  Smith's  bill 
is  likely  to  sell  anywhere  up  to  a  cent  in  the  pound  above 
Jones'.  Probably  if  you  asked  some  of  the  big  buyers 
of  exchange  on  what  they  based  their  estimates  of  rela- 
tive value  they  wouldn't  be  able  to  tell  you.  The  feeling 
about  it  would  nevertheless  remain  and  Jones'  bills  con- 
tinue to  fetch  only,  say,  481,  at  a  time  when  Smith  was 
getting  482  or  even  more  for  his. 

Now,  as  the  price  of  even  the  best  —  perhaps  we  should 
say  best  liked  —  commercial  bills  is  invariably  lower 
than  the  price  of  bankers'  bills,  it  will  be  readily  apparent 
that  considerable  profits  can  be  made  by  the  banker 
willing  to  buy  long  commercial  bills  which  he  knows  to 
be  good  but  which  do  not  command  the  highest  price 
in  the  open  market.  Here,  in  other  words,  there  is  con- 
siderable opportunity  for  the  turning  into  dollars  and 
cents  of  credit  information. 

Selling  Cables  Against  Short,  Short  Against  Long, 
etc.  —  Bankers  do  sell  cables  against  cables  and  short 
against  short  as  described  above,  but  this  is  an  elemen- 
tary form  of  business  and,  in  the  long  run,  much  less 
important  than  the  selling  of  different  kinds  of  exchange 
against  each  other  —  cables  against  demand,  for  instance, 
or  short  bills  against  remittances  of  long.     Such  opera- 


168  FOREIGN  EXCHANGE  EXPLAINED 

tions,  as  a  matter  of  fact,  make  up  the  bulk  of  dealings 
in  exchange. 

Take,  for  instance,  a  time  when,  as  often  happens, 
there  is  an  urgent  demand  for  cables,  for  some  particular 
purpose.  Sight  drafts  won't  do  —  the  money  has  to  be 
gotten  to  the  parties  on  the  other  side  before  the  next 
steamer  can  possibly  get  over.  So,  for  cables,  the  rate 
of  exchange  is  bid  up  to  a  point  considerably  beyond 
what,  based  on  interest  rates,  cables  ought  to  sell  for  in 
relation  to  sight  bills.  Just  here  comes  in  the  oppor- 
tunity of  the  banker  enjoying  good  facilities  abroad. 
His  balance  over  there  may  not  be  such  as  to  warrant  his 
selling  the  cables  he  wants  to  sell,  but  his  correspondent, 
he  knows,  will  stand  for  a  substantial  overdraft  as  long 
as  he  is  sure  that  "  cover,"  in  the  form  of  sight  exchange, 
is  coming  along  on  the  next  steamer.  So  the  banker 
here  buys  the  necessary  sight  exchange  and  then  goes 
ahead  and  sells  the  cable  at  the  prevailing  high  price. 
Very  often,  on  such  an  operation,  it  is  possible  to  make 
anywhere  up  to  a  quarter  of  a  cent  a  pound. 

In  the  above  case,  where  a  cable  is  sold  out  of  a  non- 
existent balance  abroad  on  the  understanding  that 
"  cover  "  will  be  sent  along  on  the  next  steamer,  it  is 
not,  of  course,  necessary  that  this  "  cover  "  should  con- 
sist of  sight  exchange.  Anything  that  can  be  turned 
into  money  upon  arrival  is  just  as  acceptable.  As  a 
matter  of  fact  the  "  cover,"  in  a  case  of  this  kind  where 
a  cable  has  been  sold  to  take  advantage  of  a  particularly 
high  bid,  is  likely  to  consist  of  a  variety  of  exchange  — 
short  bills,  discountable  long  bills,  anything,  indeed,  that 
can  be  turned  into  money  and  "  covered  "  into  the  balance. 


PROFIT  POSSIBILITIES  i6g 

Just  here,  perhaps,  attention  should  again  be  directed 
to  the  fact  that  any  kind  of  a  good  bill,  at  a  price,  is  grist 
to  the  foreign  exchange  banker's  mill.  If  he  has  a  cash 
payment  to  make  abroad,  he  can  make  it  just  as  well 
by  sending  over  a  discountable  ninety-day  bill  (which 
his  correspondent  can  at  once  turn  into  money)  as  by 
sending  over  a  sight  bill.  The  whole  thing  is  a  question 
of  the  amount  of  dollars  needed  to  put  the  necessary 
pounds  into  his  foreign  balance.  Whether  he  puts  a 
"  sight  "  pound  over  there  at  a  cost  to  himself  here  of 
$4.87,  or  whether  he  pays  out  $4.87  for  an  amount  of 
ninety-day  sterling  which,  after  discount,  will  mean  the 
crediting  of  his  account  by  exactly  one  pound,  makes 
not  the  slightest  difference  to  him.  He  thinks,  as  a 
matter  of  fact,  of  all  kinds  of  bills  of  exchange  —  cables, 
short,  long,  and  all  —  in  terms  of  cash  proceeds  on  the 
receiving  end.  A  sixty-day  bill  for  £1000  isn't  a  bill  for 
£1000  to  the  average  foreign  exchange  banker  at  all. 
To  him  it  is  a  sight  bill  for  £995,  or  whatever  its  net 
proceeds  will  be  after  discount. 

The  Principal  Source  of  Profit.  —  Keeping  the  above 
in  mind  will  help  us  understand  what  is  in  reality  the 
principal  function  and  profit  source  of  the  foreign  ex- 
change banker ;  that  is  to  say,  the  melting  of  merchants' 
long  drafts  against  exports  and  the  making  available 
of  the  proceeds  to  those  having  obligations  to  discharge 
abroad.  Putting  it.  the  way  a  banker  rather  than  an 
academician  would  put  it,  the  banker's  main  business 
is  to  sell  demand  against  long. 

The  reason  that  this  is  the  most  profitable  of  all 
non-speculative  foreign  exchange  dealings  is  because  of 


170  FOREIGN  EXCHANGE  EXPLAINED 

the  extent  to  which  the  credit  of  the  maker  and  the 
drawee  influences  the  price  at  which  a  commercial  long 
bill  can  be  sold.  The  very  best  of  such  bills,  as  has  been 
pointed  out,  sell  slightly  below  the  price  for  bankers' 
long  bills ;  which  latter  price,  in  its  relation  to  bankers' 
demand  bills,  is  fixed  by  the  discount  rate.  And,  from 
the  quotation  for  the  primest  and  best-known  commer- 
cial long  bills,  the  quotation  for  less  well  known  though 
perhaps  equally  good  names  runs  off  anywhere  down  to 
a  cent  in  the  pound  lower.  Here,  then,  is  an  opportunity 
for  the  banker  to  make  a  substantial  profit  by  buying 
bills  which  he  knows  to  be  just  as  good  as  the  best, 
but  which,  for  one  reason  or  another,  the  market  rates 
below  the  top. 

The  Speculative  Element  in  Exchange  Dealings.  — 
From  this  operation  of  selling  "  sight  bills  against 
long,"  the  last  vestige  of  a  speculative  element  can  be 
removed  by  the  banker's  arranging  with  his  corre- 
spondent abroad,  by  cable,  the  rate  at  which  the  long 
bills  will  be  discounted  "  to  arrive."  Knowing,  thus, 
just  exactly  what  the  proceeds  of  a  commercial  long 
bill  in  pounds,  shillings,  and  pence  will  amount  to, 
and  knowing  just  how  many  dollars  and  cents  his  own 
draft  for  that  amount  of  sterling  can  be  sold  for,  the 
banker  is  in  a  position  to  figure  exactly  what  he  can 
afford  to  pay  for  the  commercial  bill  and  break  even. 
When  he  finds  offered  a  bill,  which  he  knows  to  be  good, 
at,  say,  half  a  cent  a  pound  lower  than  the  rate  he  could 
afford  to  pay  and  still  break  even,  it  is  plain  enough  that 
the  half-cent  per  pound  is  a  sure  profit. 

Now,  if  it  seems  to  the  reader  as  though  even  a  half- 


PROFIT   POSSIBILITIES  171 

cent  per  pound  profit  ($50  on  £10,000)  were  a  pretty 
small  return  to  the  banker,  let  him  remember  that, 
outside  of  the  balance  permanently  carried  abroad, 
no  capital  need  be  used  in  the  business.  Every  day,  the 
banker  buys  bills,  paying  out  dollars.  Every  day  he 
sells  bills  against  what  he  has  bought,  taking  in  dollars. 
One  hand  washes  the  other  and  at  the  end  of  the  day 
he  is  even  —  unless,  of  course,  he  has  "  taken  a  position 
on  the  market  "  and  bought  without  selling  or  sold  with- 
out buying.  That,  of  course,  is  an  entirely  different  kind 
of  operation  and  fraught  with  far  greater  profit  and  loss 
possibilities  than  what  we  have  been  talking  about. 

Without  attempting  any  discussion  of  the  specula- 
tive possibilities  in  the  exchange  market,  it  may  be 
pointed  out  that  in  the  accumulation  of  balances  at 
foreign  points  without  selling  against  them,  there  exists 
great  chances  of  both  profit  and  loss.  Looking  at  it 
the  other  way  around,  a  banker  who  believes  that  the 
rate  of  exchange  on  some  given  point  is  headed  down 
and  not  up,  can,  if  he  wants  to  take  the  chance,  sell 
drafts  on  that  point  for  future  delivery.  Then,  if  he 
is  right  about  it  and  the  rate  does  go  down,  he  can  go 
out  into  the  open  market  when  the  time  that  he  has 
agreed  to  make  delivery  comes  around,  and  buy  in  at, 
say,  4.84,  what  he  may  have  contracted  to  deliver  at 
4.85  or  4.86.  Different  so  far  as  the  details  are  con- 
cerned, such  an  operation  in  its  essential  features  is 
exactly  the  same  as  taking  the  short  side  of  the  market 
in  stocks,  grain,  or  anything  else. 

Arbitrage  —  Three-Market  Operations.  —  Besides  the 
dealing  operations  mentioned  above  where  short  ster- 


172  FOREIGN  EXCHANGE  EXPLAINED 

ling  is  sold  against  short  sterling,  sterling  cables  against 
sterling  long  bills,  etc.,  there  must  still  be  considered 
that  class  of  entirely  legitimate  and  non-speculative 
operations  where  more  than  two  markets  are  involved  — 
where,  for  example,  bills  are  sold  on  London  against 
bills  remitted  not  to  London  but  to  Paris.  Infinite 
in  variety  and,  by  most  foreign  exchange  men  mentioned 
to  the  layman  only  with  a  pitying  smile  at  his  hopeless 
inability  to  comprehend,  such  operations  rest  on  a  prin- 
ciple which  any  one  who  gives  it  a  little  thought  ought 
to  be  able  to  understand  easily  enough. 

Take,  for  example,  one  of  those  "  arbitrage  "  trans- 
actions along  the  lines  mentioned  above.  At  New  York, 
we  will  say,  there  is  at  some  given  time  a  strong  demand 
for  sterling  drafts  on  London  while,  at  the  same  moment, 
franc  drafts  on  Paris  are  being  freely  offered.  In  Paris, 
New  York  learns  over  the  cable,  sterling  drafts  on  London 
are  also  obtainable  at  price  concessions.  What  more 
natural,  under  such  a  combination  of  circumstances, 
than  that  New  York  bankers  should  buy  franc  drafts 
on  Paris,  send  them  to  Paris  with  instructions  to  use 
them  to  buy  sterling  drafts  on  London,  and  then  draw 
their  own  sterling  drafts  on  the  London  balances  thus 
created  ?  The  francs  on  Paris  are  obtained  in  a  weak 
market,  the  pounds  on  London  are  obtained  in  a  weak 
market,  and  the  reimbursing  drafts  on  London  are  sold 
in  a  strong  market. 

What  Makes  Arbitrage  Possible.  —  The  above  is  of 
course  a  very  sketchy  way  of  dealing  with  the  super- 
sacrosanct  subject  of  exchange  arbitrage,  but  what  it 
all  comes  down  to  is  the  making  use  of  some  third  market 


PROFIT   POSSIBILITIES  173 

where  exchange  conditions  happen  for  the  moment  to 
differ  from  those  in  your  own.  In  the  case  noted  above 
there  was  a  strong  demand,  in  New  York,  for  sterling 
drafts  on  London.  The  problem  was  to  get  "  cover  " 
to  London.  As  it  happened,  that  could  be  done  through 
Paris,  where  sterling  drafts  happened  to  be  freely  ob- 
tainable. So  to  Paris  the  remittance  was  sent,  with 
instructions  that  the  francs  be  turned  into  pounds 
and  the  pounds  sent  along  to  London.  The  remittance, 
to  put  it  another  way,  was  sent  to  London  by  the  way  of 
Paris.  Had  guilders  been  weak  in  Rotterdam  or  kroner 
been  weak  in  Copenhagen,  the  remittance  might  just 
as  well  have  been  made  through  Holland  or  Denmark. 

For  such  chances  to  make  an  "  arbitrage  "  profit, 
the  expert  exchange  man  is  constantly  on  the  alert. 
With  his  extensive  connections,  he  is  constantly  kept 
informed  by  cable  as  to  how  exchange  rates  are  quoted  at 
all  the  important  foreign  money  centres.  The  moment  he 
sees  a  chance  profitably  to  draw,  for  instance  on  London, 
and  remit  by  the  way  of  Paris,  or  to  draw  on  Paris  and 
remit  by  way  of  London,  he  will  grasp  the  opportunity. 
What  he  can  make  will  rarely  run  over  a  quarter  of  a 
cent  per  pound  sterling  or  its  equivalent,  but  that, 
considering  that  no  risk  is  taken  and  no  money  put  up, 
is  considered  well  worth  while  going  after. 

What  is  particularly  to  be  noted  about  such  opera- 
tions is  that  they  tend  to  keep  all  the  important  rates  of 
exchange  on  a  parity  with  each  other.  The  moment 
one  rate  starts  to  get  out  of  line  —  either  up  or  down  — 
the  operations  of  the  arbitrageurs  tend  to  drive  it  back 
into  its  proper  relationship  with   the  other  rates.     If 


174  FOREIGN  EXCHANGE  EXPLAINED 

for  any  reason,  for  instance,  the  sterling  rate  in  Paris 
starts  to  fall  considerably  below  what  is  its  correct  rela- 
tionship to  the  sterling  rate  in  New  York,  remittances 
to  London  via  Paris  will  soon  enough  result  in  putting 
the  Paris-London  rate  back  where  it  belongs  and  where 
no  profit  can  be  made  by  the  arbitraging  operation. 

Above,  there  have  been  outlined  some  of  the  principal 
ways  in  which  the  foreign  exchange  banker  makes  money 
dealing  (non-speculatively)  in  bills.  In  addition  to 
such  operations,  of  course,  he  makes  money  out  of  issu- 
ing letters  of  credit,  making  sterling  and  other  loans, 
exporting  and  importing  gold,  etc.  To  the  question  as 
to  whether  there  is  anything  to  be  made  out  of  foreign 
exchange,  the  answer  is  that  in  a  good  many  banks 
the  foreign  department  is  the  department  which  shows 
the  biggest  net  return  on  the  amount  of  capital  used. 


CHAPTER  XVIII 

THE   SILVER  EXCHANGES 

India,  Japan,  and  most  of  the  other  great  silver  coun- 
tries of  former  years  have  long  since  adopted  either  the 
gold  standard  or  the  gold  exchange  standard  (under 
which  the  silver  currency  is  maintained  at  a  fixed  gold 
value).  There  still  remain,  however,  nine  countries  of 
more  or  less  commercial  importance  where  silver  is  used 
as  legal  tender  and  gold  is  not  recognized.  Most  im- 
portant of  these  is  China  where,  in  spite  of  continuous 
efforts  during  the  past  twenty  years  to  get  the  currency 
on  a  better  basis,  a  variety  of  silver  coins  continue  to  be 
recognized  as  legal  tender. 

Silver  Coin  Regarded  as  Bullion.  —  In  considering 
the  foreign  exchange  relationship  of  gold  standard  to 
silver  standard  countries,  it  is  necessary  to  bear  always 
in  mind  the  fact  that,  in  a  gold  standard  country,  the 
silver  coins  of  a  silver  standard  country  are  not  recog- 
nized as  money  at  all  but  simply  as  so-and-so-much 
silver  bullion.  The  fact  that  a  disc  of  silver  is  milled, 
and  stamped  "  Hongkong  Dollar  "  or  "  Mexican  Dol- 
lar "  affects  its  gold  value  in  the  United  States  not  in 
the  slightest.  To  the  man  who  owns  it,  it  is  a  piece  of 
metal  worth,  in  gold,  just  what  that  weight  of  that  par- 
ticular metal  is  selling  for.     If  silver  is  selling  at  84  cents 

175 


176  FOREIGN  EXCHANGE  EXPLAINED 

an  ounce  and  the  coin  in  question  weighs  three-quarters 
of  an  ounce,  the  value  in  American  dollars  and  cents  of 
that  coin  will  be  63  cents.  And  63  cents  is  all  that  it 
can  be  sold  for  even  though  there  is  stamped  on  the 
coin  the  statement  that  it  is  worth  a  million  dollars. 

Between  a  gold  standard  country,  then,  and  a  silver 
standard  country,  the  rate  of  exchange  is  mainly  a  matter 
of  the  price  at  which  silver  is  selling  in  the  gold  standard 
country.  Take,  for  instance,  London  and  Hongkong. 
What  will  determine  the  rate  of  exchange  in  Hongkong 
for  pounds  sterling  —  that  is  to  say  the  price  of  the 
Hongkong  dollar  expressed  in  pounds,  shillings,  and 
pence?  Simply  the  amount  of  sterling,  of  course, 
which,  at  that  particular  time,  can  be  realized  from  the 
sale  of  the  amount  of  silver  that  is  contained  in  a  Hong- 
kong dollar.  Some  one  in  Hongkong  wants  to  make  a 
remittance  to  London.  How  many  shillings  and  pence 
is  he  going  to  demand  for  each  Hongkong  dollar  he  gives 
up?  Not  less,  certainly,  than  that  Hongkong  dollar, 
less  the  expenses  of  sending  it  there,  could  be  sold  for  in 
London  as  silver  bullion.  It  is  the  price  of  silver  bullion, 
in  other  words,  which  fixes  the  rate  of  exchange. 

Price  of  Silver  and  the  Rate  of  Exchange.  —  As  the 
price  of  silver  bullion  rises,  the  rate  of  exchange  in  the 
silver-using  countries,  on  the  gold-using  countries,  tends 
to  go  down.  Why  this  is  so  will  easily  enough  be  seen 
from  consideration  of  the  fact  that,  as  the  price  of  silver 
goes  up,  the  Hongkong  dollar  or  the  Salvador  peso  or 
whatever  is  the  coin  in  question,  will  exchange  for  a 
greater  number  of  shillings  and  pence  or  other  gold 
standard  currency.     That  is,  of  course,  only  another 


THE  SILVER  EXCHANGES  177 

way  of  saying  that  the  rate  of  exchange  has  gone  down. 
When,  on  one  day,  a  hundred  or  a  thousand  pesos  will 
buy  a  draft  for  so-and-so-many  dollars  on  New  York 
and  the  next  day  they  will  buy  a  draft  for  a  greater 
number  of  dollars,  it  must  be  evident  that  the  rate  of 
exchange  has  gone  down. 

Conversely,  when  the  price  of  silver  falls,  the  rate  of 
exchange  in  the  silver-using  countries,  on  the  gold- 
using  countries,  tends  to  go  up.  The  same  amount 
of  silver,  in  that  case,  buys  a  smaller  amount  of  the 
gold  currency. 

Silver  Exchanges  Quoted  in  Gold  Currency.  —  Much 
of  the  confusion  of  mind  which  prevails  regarding  the 
above,  arises  from  non-appreciation  of  the  fact  that,  in 
a  silver-using  country,  the  rate  of  exchange  on  a  gold 
country  is  invariably  quoted  in  the  currency  of  the  gold 
country.  In  Hongkong,  for  example,  sterling  drafts  on 
London  are  never  quoted  at  so-and-so-many  Hongkong 
dollars  for  each  pound,  but  always  at  so-and-so-many 
shillings  for  each  Hongkong  dollar.  You  are  in  Hong- 
kong and  you  want  to  buy  a  sterling  draft  on  London. 
Instead  of  the  banker  telling  you  what  he  is  going  to 
charge  you  in  Hongkong  dollars  for  each  pound  sterling 
of  the  draft  you  want,  he  tells  you  how  many  shillings 
and  pence  he  will  give  you  for  each  Hongkong  dollar 
you  put  up. 

The  result  is  that  an  apparent  rise  in  the  exchange  at 
a  point  like  Hongkong  is  an  actual  decline.  The  rate  on 
London,  for  example,  changes  from  2  shillings  5  pence 
for  Hongkong  dollars  to  2  shillings  6  pence.  At  first 
thought  it  may  seem  as  though  a  rise  had  taken  place 


178  FOREIGN  EXCHANGE  EXPLAINED 

but  what  has  actually  happened  is  that  the  rate  on 
London  has  gone  down. 

Effect  of  Silver  Prices  on  Foreign  Trade.  —  Now,  to 
glance  for  a  moment  at  the  economic  effect  of  the  rise 
and  fall  in  the  price  of  silver,  it  is  plain  that  if  a  rise  in 
silver  puts  down  the  rate  of  exchange  on  gold-using 
countries,  it  has  the  effect  of  increasing  the  silver  coun- 
tries' ability  to  import  merchandise.  The  lower  your 
rate  of  exchange  on  some  outside  point,  of  course,  the 
easier  it  is  for  you  to  buy  goods  there.  If,  for  example, 
a  Hongkong  dollar  will  buy  2  shillings  and  5  pence 
worth  of  merchandise  in  London  where  formerly  it 
would  only  buy  2  shillings'  worth,  Hongkong's  ability 
to  buy  English  merchandise  is  greatly  increased.  When, 
on  the  other  hand,  the  price  of  silver  goes  down  — 
driving,  as  it  is  bound  to  do,  the  rate  of  exchange  up  — 
the  silver-using  country's  merchandise  purchasing  ability 
is  correspondingly  curtailed. 

To  the  merchant  or  manufacturer  dealing  largely 
with  the  Orient,  then,  this  question  of  the  price  of  silver 
is  of  real  and  practical  importance.  The  small  fluctua- 
tions do  not,  of  course,  make  any  particular  difference 
so  far  as  he  is  concerned.  The  big  swings  in  price,  how- 
ever, do  make  a  very  great  deal  of  difference  in  that  they 
mean  that  his  customers  in  the  East  can  or  cannot  buy 
the  goods  he  wants  to  sell  them.  Take  such  a  time  as 
in  the  nineties,  for  instance,  when  the  changing  over 
from  a  silver  to  a  gold  basis  on  the  part  of  a  number  of 
important  countries  coupled  up  with  the  development  of 
important  new  silver  mines  resulted  in  the  price  of  silver 
being  cut  in  half.     As  the  price  of  silver  fell,  the  gold 


THE  SILVER   EXCHANGES  179 

exchanges  out  in  the  silver  countries  rose,  until  the 
purchasing  power  of  those  countries  was  seriously 
affected.  Cotton  manufacturers  engaged  in  the  Chinese 
trade  will  be  a  long  time  in  forgetting  how,  as  a  result  of 
decreased  purchasing  power  on  the  part  of  their  best 
customers,  cotton  mills  all  over  the  Lancashire  district 
abroad,  and  right  here  in  New  England,  had  to  shut  down. 
Any  number  of  commissions  were  appointed  and  com- 
mittees sent  out  to  the  Far  East  to  see  what  could  be 
done  about  getting  the  exchanges  on  a  more  stable  basis, 
but  it  was  years  before  the  effects  of  the  great  decline 
in  silver  (and  the  consequent  rise  in  the  gold  exchanges) 
were  overcome  and  normal  trade  relationships  once  more 
established. 

Selling  Goods  in  Silver-Using  Countries.  —  The  fluct- 
uation in  the  silver  exchanges,  it  must  be  borne  in  mind, 
is  on  an  entirely  different  scale  from  the  fluctuation 
in  the  exchange  between  two  gold-using  countries. 
Between  London  and  New  York,  for  instance,  from  the 
beginning  of  the  century  down  to  the  opening  of  the 
War,  the  difference  between  the  highest  point  touched 
by  the  exchange  market  and  the  lowest  was  a  matter  of 
only  a  trifle  over  one  per  cent.  In  such  a  rate  as  that 
between  New  York  and  Hongkong,  on  the  other  hand, 
a  fluctuation  of  one  per  cent  is  a  matter  of  almost  daily 
occurrence.  A  change  at  Hongkong  in  the  rate  on  New 
York,  say  from  50  cents  to  55  cents,  would  mean  a  drop 
of  no  less  than  10%.  In  these  silver  exchanges  it  is 
not  a  matter  of  fractions  but  of  whole  points  at  a  time. 

Fluctuations  in  the  silver  exchanges  being  thus  violent, 
it  has  come  about  that  prices  of  practically  all  merchan- 


180  FOREIGN  EXCHANGE  EXPLAINED 

dise  sold  by  gold  countries  to  silver  countries  are  fixed 
in  the  currency  of  the  gold  country.  Where  the  move- 
ment of  the  exchange  rate  is  apt  to  run  up  to  several 
per  cent  between  the  time  the  sale  is  made  and  the  time 
the  goods  are  paid  for,  it  is  natural  that  the  seller  of  the 
goods  should  insist  that  this  risk  be  assumed  by  the 
buyer.  On  any  other  basis  the  sale  would  simply  not 
be  made. 


APPENDIX 

HOW  TO  CONVERT  POUNDS,  FRANCS,  AND 
MARKS  INTO  U.  S.  CURRENCY  AND  VICE 
VERSA 1 

The  methods  of  figuring  or  converting  the  monies  of 
the  different  foreign  countries  into  the  money  of  the 
United  States  and  vice  versa  are  not  generally  understood 
even  by  dealers  in  foreign  exchange,  for  the  reason  that 
printed  tables  are  provided  and  generally  used  for  such 
purpose,  which  not  only  insure  accurate  computation  but 
save  much  time  and  labor.  Students,  however,  who 
desire  to  acquire  a  thorough  knowledge  of  the  science  of 
foreign  exchange  should  be  able  to  figure  all  transactions 
without  the  use  of  tables.  The  operations  in  figures  are 
shown  in  the  following  examples  : 

ENGLISH  MONEY 

Table 

4  farthings  (far.)  =  i  penny 
12  pence        (d.)     =  i  shilling 

20  shillings   (s.)     =  1  pound  or  sovereign 

21  shillings  =  1  guinea 


£ 

s. 

d. 

far. 

1 

= 

20 

= 

240 

=■ 

960 

1 

= 

12 

1 

= 

48 
4 

1  Used  by  permission  of  H.  K.  Brooks,  New  York,  author  of  "  Brooks' 
Foreign  Exchange  Textbook." 

181 


l82 

APPENDIX 

Example  i 

Addition,  English  Money. 

£ 

s. 

d. 

240 

12 

8 

iS 

10 

S 

5 

5 

4 

Answer    £261 

8s. 

5d. 

Explanation.  —  Since  1 2  pence  equal  1  shilling  and 
the  total  of  pence  is  17,  carry  1  to  shillings,  leaving  5 
pence.  As  the  total  of  shillings  is  28  (including  1  for- 
ward from  pence)  and  there  are  20  shillings  to  the  pound, 
carry  1  to  pounds,  leaving  8  shillings. 


Example  2 

Multiplication,  English  Money. 

£ 

s. 

d. 

215 

12 

8 

4 

Answer    £862 

IOS. 

Sd. 

Explanation.  —  4  times  8  pence  =  32  pence  or  2s. 

8d.,  therefore  carry  2  to  shillings.     4  times  12s.  =  48s. 

plus  2s.  =  50s.,  or  £2  ios.,  therefore  carry  2  to  pounds, 

leaving  ios.     4  times  £215  =  £860,  plus  £2  carried  from 

shillings  =  £862. 

Example  3 


Subtraction,  English  Money. 

£ 

s. 

d. 

215 

12 

8 

212 

iS 

10 

Answer    £     2 

1 6s. 

iod. 

Explanation.  —  Since  iod.  cannot  be  subtracted  from 
8d.,  add  i2d.  to  the  minuend  (upper  figures),  making  2od. 
iod.  from  20  =  iod.  Since  16s.  (includes  is.  brought  for- 
ward)  cannot  be  subtracted  from  12s.,  add  20  to  the 


APPENDIX  183 

minuend,  making  32s.     16s.  from  32s.  =  16s.     Carry  1 
to  pounds.     £213  from  £215  =  £2. 

Example  4 
Division,  English  Money. 

£  s.  d. 

4)25 12 4 

Answer    £  6  7s.  7d. 

Explanation.  —  Since  4  into  25  goes  6  times,  leaving 
remainder  of  £1  or  20s.,  carry  20  to  shillings,  making  30s. 
4  into  30  goes  7  times,  leaving  remainder  of  2s.  or  24d., 
thus  making  28d.  into  which  4  goes  7  times. 

Example  5 

Reducing  Pounds,  Shillings,  and  Pence  to  Decimal  of  Pound  for 
Convenience  in  Figuring. 
Reduce  £525  10s.  6d.  to  pounds  and  decimal. 
Operation:  £525  =  £525. 

s.  10  =  .50 

d.     6  = .025 

Answer  (Decimal)         £525.525 

Explanation.  —  Multiply  shillings  by  .05  because  is. 
is  1-20  or  5-100  of  a  pound.  Multiply  the  pence  by 
.004  1-6  because  id.  is  1-240  or  4^  thousandths  of  a 
pound.  To  avoid  the  use  of  the  fraction  £,  add  1  if 
amount  is  over  12  and  2  if  over  35,  and  result  will  be 
the  same. 

Note.  —  The  reducing  of  pounds,  shillings,  and  pence  to  decimal,  as 
above  shown,  simplifies  the  process  of  converting  English  money  into 
United  States  money,  as  will  be  seen  by  examples  following. 

Example  6 

Conversion:   English  Money  into  United  States  Money. 

To  find  the  equivalent  in  United  States  money  of  £525  10s.  6d.,  at 
"rate  of  exchange,"  $4.96!  per  pound. 


184  APPENDIX 

Operation:  £525  =  £525. 

s.  10  =          .50 
d.     6  = .025 

£525-525 

4.9650  Rate 

26276250 

315315° 

4729725 

2TQ2IOO 

Answer —  2609.2316250    ($2609.23) 

Note.  —  See  Example  5  for  explanation  of  reducing  pounds,  shillings, 
and  pence  to  decimal. 

Explanation.  —  Reduce  pounds,  shillings,  and  pence 
to  decimal  as  explained  in  Example  5.  Multiply  the 
decimal  by  rate  of  exchange  ($4.96!),  which  gives  amount 
in  dollars  and  cents  United  States  money. 

Note.  —  See  Example  7  showing  conversion  of  same  amount  United 
States  money  ($2,609.23),  into  English  money,  which  verifies  correctness 
of  figures  in  Example  6. 

Example  7 

Conversion  :  United  States  Money  into  English  Money. 

To  find  the  equivalent  in  English  money  of  $2,609.23  (United  States 
money)  at  rate  of  exchange,  $4,965  per  £. 

Operation:  Rate  4.9650)2609.2300(525.524 

2482.50     20 

126.730  s.  10.480 

99-3°o Li 

27.4300  d.   5.760 
24-8250 
2.60500  Answer  —  £525  10s.  6d. 

2.48250 
Note.  —  See  Example  6  show- 

,  122500 

ing  conversion  of  same  amount 

English  money  (£525  10s.  6d.)  into  — ■ 

United  States  money,  which  veri-  232000 

fies  correctness  of  figures  in  Ex-  198600 

ample  7.  334°° 


APPENDIX  185 

Explanation.  —  Divide  amount  in  dollars  and  cents 
(United  States  money)  by  the  rate  of  exchange  per 
pound,  and  it  gives  the  amounts  in  pounds  and  decimal 
of  pound.  Multiply  the  decimal  (not  the  pounds)  by 
20  (20s.  =  £1)  and  it  gives  the  shillings  and  decimal  of 
shilling.  Multiply  the  decimal  (not  the  shillings)  by 
12  (i2d.  =  is.)  and  you  find  the  pence  and  decimal  of 
penny.  If  decimal  of  penny  is  50  or  over  add  1  to  amount 
in  pence,  otherwise  discard  same. 

Example  8 

Conversion  :  English  Money  into  United  States  Money  (another 
way). 
To  find  the  equivalent  in  United  States  money  of  £226  8s.  od.  at 
"rate  of  exchange,"  $4.86  per  £. 

Operation:          £226        8s.    gd. 
20s. 

4528 
1 2d. 


54345 
4.86  Rate 

326070 
434760 
217380 


240)264116.70(1100.486 
240 
241 
240  Answer  —  $1,100.49 

1167 
o6p_ 
2070 
1020. 


1500 
1440 


Note.  —  The  method  shown  in  Example  6  for  converting  English 
money  into  United  States  money  will  be  found  more  simple  than  that 
employed  in  this  example. 


186  APPENDIX 

Explanation.  —  Multiply  the  pounds  (226)  by  20 
(20s.  =  £1)  and  add  thereto  the  amount  in  shillings  (8), 
which  gives  amount  in  shillings.  Multiply  that  product 
by  12  (i2d.  =  is.)  and  add  thereto  the  amount  in  pence 
(9),  which  gives  total  amount  in  pence.  Multiply  the 
pence  (54345)  by  rate  per  pound  ($4.86)  and  we  find  the 
pence  and  decimal.  Divide  that  product  by  240,  there 
being  240  pence  to  the  pound,  and  you  arrive  at  the 
equivalent  in  dollars  and  cents,  United  States  money. 

Example  9 

Interest  or  Percentage,  English  Money. 

To  find  interest  at  rate  of  4  per  cent  on  £550  15s.  nd.  for  one  year. 
Or  what  amount  in  English  money  4  per  cent  of  £550  15s.  nd.  would  be. 
Operation:  £550  =  £550. 

s.  15  =  -75 

d.  n  =  .046 

Decimal  £550.796 

•04% 
22.03184  (pounds  and  decimal) 

20s. 

s.  0.63680 

i2d. 

d.  7.64160    Answer  —  £22  os.  8d. 

Explanation.  —  First,  reduce  pounds,  shillings,  and 
pence  to  decimal  as  explained  in  Example  5.  Multiply 
the  whole  decimal  by  rate  per  cent  (4%),  which  gives 
pounds  and  decimal  of  pound.  Multiply  the  decimal 
(not  the  pounds)  by  20  (20s.  =  £1)  and  you  get  the 
shillings  and  decimal  of  a  shilling.  Multiply  the  decimal 
of  shilling  (not  the  shillings)  by  12  (i2d.  =  is.),  and  it 
gives  the  pence  and  decimal  of  penny.  As  the  decimal 
of  penny  exceeds  5  (§d.)  add  1  to  pence. 


APPENDIX 


187 


Example  10 
Interest,  English  Money. 

To  find  the  interest  in  English  money,  on  £50  12s.  6d.,  for  93  days 


at  rate  6  per  cent,  allowing  365  days  to  the 

year. 

Operation  :     £50  =  £50. 

S.I  2  =          .60 

d.  6  =         .025 

Decimal       £50.625 

.06% 

(Days  in  year)           365)3.03750(00832 

2920 

.00832 

"75 

93  days 

1095 

02496 

800 

.07488 

Z2°_ 

£0.77376 

20s. 

s.  1547520 

i2d. 

d.  5.70240 


Answer  —  £0  15s.  6d. 


Explanation.  —  Reduce  pounds,  shillings,  and  pence 
to  decimal  as  explained  in  Example  5.  Multiply  the 
pounds  and  decimal  by  rate  per  cent  (6%).  Divide 
the  product  by  the  number  of  days  in  year  (365)  and 
multiply  the  quotient  by  the  number  of  days  for  which 
interest  is  to  apply  (93).  Multiply  that  product  by 
20  (20s.  =  £1)  and  it  gives  the  shillings  and  decimal. 
Multiply  the  decimal  of  shillings  (not  the  shillings) 
by  12  (i2d.  =  is.)  and  you  find  the  pence  and  decimal 
of  penny. 


188  APPENDIX 


Example  ii 

Interest  or  Per  Cent,  English  Money. 
To  find  4  per  cent  of  £550  15s.  nd. 
Operation:    £5.50  15s.  nd. 


■04%  (Rate  per  cent) 


£22.03  3s.  8d. 

20s. 

s.    0.63  (3s.  added) 

12 
d.    7.64  (8d.  added)    Answer  —  £22  os.  8d. 

Explanation.  —  Point  off  two  figures  from  the  right 
in  pounds.  Multiply  by  rate  per  cent  (4%).  4  times 
1  id.  =  44d.or3S.  8d.  4  times  15s.  =  60s.,  plus  3s.  (carried 
from  pence)  =  £3  3s.  4  times  £5.50  plus  £3  =  £22.03. 
Multiply  decimal  of  pounds  .03  by  20s.  =  60  plus  3s.  = 
.63s.  Multiply  .63s.  by  i2d.,  adding  8d.  =  7-64d.  or  8d., 
thus  giving  answer,  £22  os.  8d. 

Example  12 

Importations,  Valued  in  English  Money. 

To  find  in  United  States  money  value  of  goods  imported,  invoiced  at 
£550  15s.  nd.,  the  ad  valorem  duty  upon  which  is  30  per  cent. 
Operation:  £550  =  £550. 

s.  15  =  -75 

d.  11  =  .046 

Decimal     £550.796 
Rate  of  Exchange  (par)  4-8665    As  used  by  Custom  House. 

2753980 
3304776 
3304776  2680.45 

4406368 
2203184  $804,135  duty 

Cost  in  U.  S.  money  with-      $2680.4487340 
out  duty.  804.13 

Cost  including  duty  $3484.58  —  Answer 


•30% 


APPENDIX  189 

Explanation.  —  Reduce  pounds,  shillings,  and  pence 
to  decimal  as  explained  in  Example  5.  Multiply  decimal 
by  the  par  rate  of  exchange  as  fixed  by  Director  of  the 
United  States  mint.  Multiply  product  by  rate  per  cent 
duty  (30  %)  and  add  that  product  to  cost,  not  including 
duty. 

FRENCH,  BELGIAN,  AND  SWISS  MONEY 
1  Franc  «  100  Centimes 

The  money  of  account  of  France,  Belgium,  and  Switzer- 
land is  the  franc  of  100  centimes,  the  actual  value  of  the 
gold  unit  in  the  money  of  the  United  States  being  19.3 
cents. 

In  exchange  transactions  between  the  United  States 
and  France,  Belgium,  and  Switzerland,  the  rate  of  ex- 
change as  usually  quoted  in  large  cities  is  the  variable 
number  of  francs  and  centimes  allowed  per  $1.00,  which 
is  expressed,  for  example,  thus  :  Frs.  5.16-r,  meaning  that 
5  francs  and  i6i  centimes  would  be  allowed  for  each 
$1.00  United  States  money.  At  the  smaller  cities  and 
towns  it  is  customary  for  sellers  of  exchange  to  quote 
the  rate  for  a  single  franc,  as  follows  :  19.35  cents,  mean- 
ing 19  and  35-100  cents  (United  States  money)  for  each 
franc. 


igo  APPENDIX 

Example  13 

Conversion:  French,  Belgian,    and  Swiss  Money  into  United 

States  Money. 

Find  cost  of  francs  5250.50  at  rate  of  exchange  francs  5.i6|. 

Operation:  (Rate)  5.1625)5250.5000(1017.046 
51625 
88000        Answer  —  $101 7.05 
51625 

363750 
361375 

237500 

206500 


310000 
309750 


Explanation.  —  Divide  the  amount  in  francs  by  the 
rate  of  exchange. 

Example  14 

Conversion:  United  States  Money  into  French,  Belgian,  and 
Swiss  Money. 
To  find  the  amount  in  francs  and  centimes  that  can  be  purchased  for 
$1017.05  at  rate  of  exchange,  francs  5.165  per  $1.00. 
Operation:  1017.05 

5.1625 


508525 
203410 
610230 
101705 
508525 
Francs         5250.520625       Answer  —  Francs  5250.52 

Explanation.  —  Multiply  amount  in  United  States 
money  by  the  rate  of  exchange. 

Note.  —  Example  14  is  reverse  of  Example  13.  The  difference 
of  2  centimes  (§  cent)  is  caused  by  not  using  exact  fraction  .046 
centimes. 


APPENDIX  191 

Example  15 

Conversion  :    French,   Belgian,   and   Swiss  Money  into   United 
States  Money. 
To  find  cost  of  francs  5250.50  in  United  States  money  at  rate  of  ex- 
change, francs  5165  minus  1-16  of  1  per  cent  (expressed  francs  516^  — 
1-16). 

Operation:  5.1625)5250.5000(1017.046  (U.  S.  money) 
51625 


88000 

51625 

(1-16  of  1%  of  amount) 

363750 

$1017.05 

36i375 

.01 

237500 

16)    10.1705 

206500 

$1017.05 

.6356  or  64c. 

310000 

.64 

30975o 

$1016.41 

Answer 

Explanation.  —  Divide  amount  in  francs  and  cen- 
times (5250.50)  by  rate  of  exchange  without  using 
fraction  1-16  of  1  per  cent,  as  that  applies  only  to  amount 
in  United  States  money.  Find  1-16  of  1  per  cent  of 
amount  in  United  States  money  ($1017.05),  which  is 
64  cents.  Deduct  64  cents  from  amount  in  United 
States  money  and  you  have  the  answer. 

Example  16 

Conversion  :   French,   Belgian,   and   Swiss   Money  into   United 
States  Money. 
To  find  cost  of  francs  5250.50  in  United  States  money  at  rate  of 
exchange,  francs  5.165  plus  1-16  of  1%  (expressed  francs  5.16^  +  1-16). 
Operation  :   5. 1625)5250. 5ooo($ioi7.05 
(See  operation  Example  15) 
i-i6of  1  per  cent  of  $1017.05  =  64  cents  (See  Example  15) 
$1017.05  plus  64  cents  =  $1017.69  —  Answer 

Explanation.  —  Divide  amount  in  francs  and  cen- 
times by  rate  of  exchange,  which  gives  amount  in  United 


192 


APPENDIX 


States  money.     Find  1-16  of  1  per  cent  of  amount  of 
United  States  money  and  add  same  thereto. 

Example  17 

Conversion  of  United  States  Money  into  French,  Belgian,  and 
Swiss  Money. 
To  find  amount  of  francs  and  centimes  that  can  be  purchased  for 
$1017.05  at  rate  of  exchange,  francs  5.16J  minus  1-16  of  1  per  cent  (ex- 
pressed francs  5.16^  —  1-16). 

Operation:  5.1625  X  1017.05  =  francs  5250.52 
(See  Example  14) 
1-16  of  1%  of  $1017.05  =  64  cents 
5-1625 

M 

206500 
309750 


3.304000  francs 
Francs  5250.52  plus  francs  3.30  =  francs  5253.82,  the  Answer 

Explanation.  —  Multiply  amount  of  United  States 

money  by  rate  of  exchange,  as  in  Example  14,  which  gives 

amount  in  francs  and  centimes.     Find  1-16  of  1  per  cent 

of  amount  of  United  States  money,  as  in  Example  15. 

Multiply  that  product  (64  cents)  by  rate,  which  gives 

amount  in  francs  and  centimes  (F.  3.30)  to  be  added  to 

amount  of  francs  and  centimes  given  at  the  regular  rate 

(frs.  5.i6». 

Example  18 

Conversion:  United  States  Money  into    French,  Belgian,  and 
Swiss  Money. 
To  find  amount  in  francs  and  centimes  that  can  be  purchased  for 
$1017.05  at  rate  of  exchange  francs  5.16^  plus  1-16  (expressed  francs 
5.16*+  1-16). 

Operation:  $1017.05 

5.1625  (rate) 
Equals  5250.52  francs 

(See  Example  14) 
1-16  of  1%  of  $1017.05  =  64  cents 
(See  Example  15) 


APPENDIX  193 

64  cents  at  rate  of  exchange,  francs  5.165  will  be  francs  3.30,  which 
is  arrived  at  by  multiplying  rate  5.1625  by  64  cents. 

Deduct  francs  3.30  from  francs  5250.52  =  francs  5247.22  —  Answer 

Explanation.  —  Multiply  amount  in  United  States 
money  by  rate  of  exchange  (not  including  fraction  1-16 
of  1  per  cent)  to  find  amount  in  francs  and  centimes  at 
regular  rate  which  can  be  purchased  for  $1017.05.  As 
the  fraction  is  plus,  a  less  number  of  francs  and  centimes 
would  be  given,  therefore  francs  3.30,  which  are  equiva- 
lent to  64  cents  at  rate  5.16^,  should  be  deducted. 

Note.  —  Always  bear  in  mind  that  where  the  fractional  rates  of  plus 
or  minus  are  used,  it  applies  only  to  the  amount  in  United  States  money ; 
therefore,  in  determining  the  amount  of  francs  and  centimes  that  can  be 
allowed  for  a  certain  sum  in  United  States  money,  if  the  fraction  is  minus, 
more  francs  and  centimes  will  be  given ;  and  if  plus,  a  less  number. 

Example  19 

Conversion  :  To  Find  Price  per  Single  Franc  when  Rate  Quoted 
is  per  $1.00. 

To  find  the  price  of  a  single  franc  when  rate  of  exchange  is  quoted  at 
francs  5. 16 J. 

Operation:     5.i625)i.oooooo(.iq37 
51625 

483750 
464625 

191250 

154875 


363750 
361375 


Answer  —  .1937  cents  or  19  37-100  cents  per  franc. 

Explanation.  —  Divide  one  dollar  by  the  rate  per 
$1.00. 

Note.  —  For  figuring  large  sums  the  amount  in  cents    should  be 
carried  out  five  or  six  figures,  as  for  example :  .1937046. 
o 


i94  APPENDIX 

Always  bear  in  mind  that  the  higher  the  quoted  rate  per  $1.00  for 
French,  Belgian,  and  Swiss  exchange  the  lower  the  actual  price.  For 
example:  $5000  at  rate  francs  5.15  would  give  25,750  francs,  while 
25,750  francs  at  rate  francs  5.20  per  1.00  would  cost  only  $4951.92. 

Conversion,  French  Exchange  :  To  Find  the  Price  of  a  Single 
Franc  when  Rate  is  Quoted  per  $1.00  and  is  Supplemented 
by  a  Fractional  Rate  of  Plus  or  Minus,  such  as  Francs  5.165  — 
1-16. 

Explanation.  —  First  find  the  price  of  a  single  franc 
at  the  straight  rate  of  5-i6j,  as  shown  in  Example  19, 
which,  if  carried  out,  would  have  been  .1937046  -+-,  then 
find  1-16  of  1  per  cent  of  that  rate,  which  in  this  case 
would  be  .000121.  If  fraction  were  minus,  as  quoted 
above,  you  would  deduct  .000121  from  .1937046,  which 
would  leave  net  rate  .1935836  +,  the  answer.  If 
fraction  were  plus  1-16  of  1  per  cent  the  product  .000121 
should  be  added  to  rate,  thus  making  net  rate  per 
single  franc  .1938256  +.  It  is  unnecessary  to  use 
all  the  figures  of  the  decimal  when  figuring  the  smaller 
amounts  in  francs  and  dollars. 

Example  20 

Conversion  :  French,  Belgian,  and  Swiss  Money  into  United  States 
Money,  when  Rate  of  Exchange  is  Quoted  per  Single  Franc. 

To  find  cost  of  francs  5250.50  at  rate  19.37  cents  per  single  franc. 
Operation:         5250.50 
•  1937 


3675350 
1575150 
472545° 
525050 


1017. 021850,  or  $1017.02  —  Answer 

Explanation.  —  Multiply  the  amount  in  francs  and 
centimes  by  the  rate  per  single  franc. 


APPENDIX  195 

Note.  —  See  Example  13.  You  will  note  that  the  same  amount  in 
francs  and  centimes  at  rate  francs  5.16!  gives  same  result,  or  practically 
so,  for  the  reason  shown  in  Example  19.  In  other  words,  the  rate  francs 
5.16^  per  $1.00  is  practically  same  as  .1937  cents  per  single  franc,  the 
slight  difference  being  due  to  not  using  the  full  decimal  of  cents. 


Example  21 

Conversion  :  United  States  Money  into  French,  Belgian,  and  Swiss 
Money  when  Rate  of  Exchange  is  Quoted  per  Single  Franc. 

To  find  the  amount  in  francs  and  centimes  that  can  be  purchased 
for  $1017.02  at  rate  of  exchange  —  .1937  cents  per  franc. 
Operation :  1937)1017.0200(5250.49 
9685 
4852 
3874 


9780 
9685 


Answer  —  Francs  5250.49 


9500 
7748 
17520 
17433 
87 


Explanation.  —  Divide  the  amount  in  dollars  and 
cents  by  the  rate  of  exchange  per  single  franc. 

Note.  —  You  will  observe  that  Example  21  is  proof  of  the  correct- 
ness of  Example  20  of  same  amounts,  the  slight  difference  in  amount 
of  centimes  being  on  account  of  not  using  the  full  fraction. 

Addition,  Subtraction,  Division,  and  Multiplication  of  French, 
Belgian,  and  Swiss  Money  are  Determined  by  Same  Process 
as  with  United  States  Money. 


196  APPENDIX 

GERMAN  MONEY 
i  Mark  =  ioo  Pfennigs 

The  monetary  unit  of  Germany  is  the  reichsmark  or 
mark,  of  ioo  pfennigs,  the  value  of  the  gold  unit  in  the 
money  of  the  United  States,  as  fixed  by  the  Director  of 
the  United  States  mint,  being  23.8  cents. 

In  exchange  transactions  with  Germany  it  is  the 
custom  in  large  cities  to  base  the  rate  of  exchange  upon 
the  equivalent  of  4  marks,  expressed  in  cents  thus : 
"95!  cents,"  meaning  that  for  each  4  marks  95!  cents 
would  be  charged. 

In  the  smaller  cities  and  towns,  the  rate  of  exchange 
is  quoted  for  a  single  mark,  thus  :  "  23.85  cents,"  meaning 
that  for  each  mark  23  and  85-100  cents  would  be 
charged. 

Example  22 

Conversion  :  Marks  into  Dollars  at  Rate  per  4  Marks. 

To  find  the  cost  of  marks  5240.20  at  rate  of  exchange,  95  1-16  cents 
per  4  marks. 

Operation :  4).Q5o625  (95  1-16) 
.237656  =  1  mark 

Marks  5240.20 

at           .237656  per  1  mark 
3144120 
2620100 
3144120 
3668140 
1572060 
1048040 


$1245.36497120,  or  $1245.36  —  Answer 

Explanation.  —  Divide  the  rate  per  4  marks  by  4  to 
determine   the   cost  of   a   single  mark.     Multiply   the 


APPENDIX  197 

amount  in  marks  and  pfennigs  by  cost  per  single 
mark,  and  the  result  will  be  the  cost  in  United  States 
money. 

Example  23 

To  find  the  cost  of  5000  marks  at  rate  of  exchange,  95 J  cents  per  4 
marks. 

Operation :  5000  marks 

.9525  rate  per  4  marks 
25000 
1 0000 
25000 
45°°° 
4)47625000 
1190.625  —  Answer  —  $1190.63 

Explanation.  —  Multiply  amount  in  marks  by  the 

rate  of  exchange  per  4  marks  and  divide  the  product  by 

4  (marks). 

Example  24 

Conversion  :  Dollars  into  Marks  at  Rate  per  4  Marks. 

To  find  the  amount  in  marks  and  pfennigs  that  can  be  purchased  for 
$1245.37  at  rate  of  exchange,  95  1-16  per  4  marks. 
Operation :  4) .95062 5  rate  per  4  marks 
.237656  rate  per  1  mark 

.237656)1245.370000(5240.22 
1188280 
570900 
475312 

955880    Answer  —  Marks  5240.22 
950624 
525600 
475312 
502880 
475312 


27568 

Explanation.  —  Divide  the  rate  by  4  to  determine 
rate  per  single  mark.     Divide  amount  in  dollars  and  cents 


iq8  APPENDIX 

by  rate  per  single  mark  and  the  result  will  be  amount  in 
marks  and  pfennigs. 

Example  25 

Conversion  :  Dollars  into  Marks  at  Rate  per  4  Marks.    (Another 
way.) 
To  find  the  amount  in  marks  and  pfennigs  that  can  be  purchased  for 
$1190.62^  at  rate  of  exchange,  95!  cents  per  4  marks. 
Operation:  .9525)1190.6250(1250.00 

9525        4  marks 

23812       5000.00  marks  —  Answer 
19050 
47625 
47625 

Note.  —  See  Example  23  for  proof  of  correctness  of  these  figures. 

Explanation.  —  Divide  amount  in  dollars  and  cents 
by  the  rate  per  4  marks,  and  multiply  the  quotient  by 
4,  and  the  result  will  be  in  marks  and  pfennigs. 

Example  26 

Conversion  :  Marks  into  Dollars  at  Rate  per  4  Marks,  Supple- 
mented with  Fractional  Quotations. 

To  find  the  cost  of  marks  5240.50  at  rate  of  exchange,  95J  cents 
per  4  marks,  minus  1-32  of  1%  (expressed  95 \  —  1-32). 
Operation :  4)^9525      rate  per  4  marks 
.238125  rate  per  1  mark 

5240.50  marks 
at  .238125  cents  per  mark 


2620250 
1048 I 00 

524050 

1-32  of  1% 
1247.89 
.01 

4192400 

1572150 

1048100 

32)i2.4789(.389  or  39  ct». 
96. 
287 
i$6_ 

3i8 

288 

$1247.89406250 
[-32  of  1%  =     39 
Answer  —  $1247.50 

APPENDIX  199 

Explanation.  —  Divide  rate  per  4  marks  (without 
fraction)  by  4  to  find  rate  per  single  mark.  Multiply 
amount  in  marks  and  pfennigs  by  rate  per  single  mark 
and  the  result  will  be  amount  in  dollars  and  cents. 
Find  1-32  of  1  per  cent  of  amount  in  dollars  and  cents 
and  deduct  same  from  cost  at  regular  rate. 

Note.  —  If  supplementary  fractional  rate  were  plus  1-32  of  1% 
instead  of  minus,  its  equivalent  of  39  cents  would  be  added  to  cost  at 
regular  rate. 

Example  27 

Conversion  :   Dollars  into  Marks  at  Rate  per  4  Marks,  Supple- 
mented with  Fractional  Quotations. 

What  amount  in  marks  and  pfennigs  can  be  purchased  for  $1247.89 
at  rate  of  exchange,  955  plus  1-32  of  1%  (expressed  95J  +  1-32). 

Operation  :  4)9525  rate  per  4  marks 

.2381  rate  per  1  mark,  or  .238125,  carried  out 

.238125)1247.890000(5240.48 
1 190625 
572650 
476250 
964000    Marks  5240.48 
1-32  of  1%  of  952500  1.64 

marks  5240.48  =  marks  1.64     11 50000  5238.84  marks  —  Answer 

(See  below)  952500 

5240.48  1975000 

.01  1905000 

32)52.4048(1.637  or  marks        70000 
3_2_  1.64 

204 
192 
120 
g6_ 
244 
224 

20 


zoo  APPEiNDLX 

Explanation.  —  Divide  the  rate  per  4  marks  (with- 
out fraction)  by  4  to  determine  rate  per  single  mark. 
Divide  amount  in  dollars  and  cents  by  rate  per  single 
mark  and  the  result  will  be  amount  in  marks  and  pfennigs. 
Find  1-32  of  1  per  cent  of  amount  in  marks  and  pfennigs, 
deducting  same  from  amount  in  marks  and  pfennigs  at 
regular  rate. 

Note.  —  If  supplementary  fractional  rate  had  been  minus  1-32  of  1% 
instead  of  plus,  its  equivalent  of  1.64  marks  would  have  been  added  in- 
stead of  deducted. 

Example  28 

Conversion  :  Marks  into  Dollars  at  Rate  per  4  Marks,  Supple- 
mented with  Fractional  Rate.     (Another  way.) 

To  find  the  cost  of  marks  5240.50  at  rate  of  exchange,  955  cents 
per  4  marks  minus  1-32  of  1%  (expressed  95^  —  1-32). 
Operation:        5240.50  marks 

■0525  rate  per  4  marks 


2620250 

1048100 

2620250 

4716450 

4)4001576250 

1247.894 

1-32  of  1%  of  $1247.89  =  39  cents 

39 

(See  Example  26) 

$1247.50  —  Answer 
Note.  —  For  verification  of  the  result  see  Example  26. 

Explanation.  —  Multiply  amount  in  marks  and 
pfennigs  by  the  rate  per  4  marks  and  divide  the  product 
by  4,  which  gives  amount  in  dollars  and  cents  at  regular 
rate.  Deduct  therefrom  1-32  of  1  per  cent  and  the 
result  will  be  the  cost. 

Note.  —  If    the  fraction  had    been   plus  instead  of  minus,  the 
39  cents  would  have  been  added  instead  of  subtracted. 


APPENDIX  aoi 

Example  29 

Conversion  :   Dollars  into  Marks  at  Rate  per  4  Marks,  Supple- 
mented by  Fractional  Rate.     (Another  method.) 

To  find  the  amount  in  marks  and  pfennigs  that  can  be  purchased 
for  $1247.89  at  rate  of  exchange,  95  j  cents  per  4  marks  plus  1-32  of 
1  %  (expressed  9 si  +  1-32). 

Operation:  .9525)1247.89000(1310.12 

9525  , 4 

29539         5240.48  marks 
28575  1-64 

9640      5238.84  marks  —  Answer 
9525 
1 1 500 

9525  1-32  of  1%  of 

19750      marks  5240.48  =  marks  1.64 
19050  (See  Example  27) 

700 
Note.  —  See  Example  27  for  verification  of  these  figures. 

Explanation.  —  Divide  amount  in  dollars  and  cents 
by  rate  per  4  marks  and  multiply  that  result  by  4  to 
find  amount  of  marks  and  pfennigs  at  regular  rate. 
Find  1-32  of  1  per  cent  of  amount  in  marks  and  pfennigs 
(5240.48)  and  deduct  same  from  amount  of  marks  and 
pfennigs  at  regular  rate  and  the  result  will  be  the  net 
amount  of  marks  and  pfennigs  that  can  be  purchased. 

Note.  —  If  the  fraction  had  been  minus  1-32  of  1%  instead  of  plus 
1-32  of  1%,  the  1.64  marks  would  have  been  added  instead  of  subtracted. 

GERMAN  EXCHANGE 
Quotations,  per  4  Marks 

To  determine  the  price  of  a  single  mark  when  rate  is 
quoted  per  4  marks,  supplemented  by  fractional  quota- 
tions, plus  or  minus,  such  as  954  —  1-16  :   First  find  the 


202  APPENDIX 

rate  per  single  mark  at  the  regular  quotation  (95I)  by 
dividing  same  by  4,  as  in  Examples  22,  24,  26,  and  27. 
This  would  make  .238125  cents  per  mark.  1-16  of  1 
per  cent  of  .238125  is  .0001488,  which  if  deducted  from 
.238125  gives  .237976  +,  the  net  rate  per  single  mark  at 
quotation  of  95^  —  1-16.  If  fraction  were  plus  1-16,  the 
equivalent  of  this  fraction  of  1  per  cent  would  be  added 
to  rate  per  single  mark,  making  same  .2382738.  Where 
the  amount  to  be  converted  is  small  it  is  unnecessary 
to  use  all  the  figures  here  used  in  the  decimal  of  a  cent. 

Example  30 

Conversion  :  Marks  into  Dollars  at  Rate  per  Single  Mark. 
To  find  the  cost  of  marks  2050.50  at  rate  23.82  cents  per  mark. 
Operation :         2050.50  marks 

■  2382  rate  per  1  mark 
410100 
1640400 
615150 
410100 
488.429100,  or  $488.43  —  Answer 

Explanation.  —  Multiply    amount    in    marks    ai^d 
pfennigs  by  rate  per  single  mark. 

Example  31 

Conversion  :  Dollars  into  Marks  at  Rate  per  Single  Mark. 

What  amount  in  marks  and  pfennigs  will  $488.43  bring  at  rate  23.82 
cents  per  single  mark? 

Operation :  .2382)488.4300(2050.50  marks  —  Answer 
4764 
12030 

IIQIO 


12000 
IIQIO 
900 


APPENDIX 


203 


Monetary  Systems  of  the  World's  Principal 
Countries 

(U.  S.  Government  Figures) 
UNITED  STATES 
The  weight,  fineness,  etc.,  of  the  coins  of  the  United 

States  are  as  follows  : 

Gold 


Denominations 

Weight 

Fine- 
ness 

Fine 
Weight 

Weight 

Pure 
Gold  or 
Silver 

Value  in 
United 
States 
Money 

Thou- 

Grams 

sandths 

Grams 

Grains 

Grains 

Double  eagle  ($20) 

33-4370 

900 

30-0933 

516.0000 

464.4000 

$20.0000 

Eagle  ($10)      .     . 

16.7185 

900 

15.0466 

258.0000 

232.2000 

10.0000 

i  eagle  ($5)      .     . 

8.3592 

900 

7-5232 

129.OOOO 

116. IOOO 

5.0000 

\  eagle  ($2.50)      . 

4.1796 

900 

3.7616 

64.5000 

58.0500 

2.5000 

1  dollar x      .     .     . 

I.6718 

900 

1.5046 

25.8000 

23.2200 

1 .0000 

Silver 


Dollar 
5  dollar 
\  dollar 
Dime 


26.7301 

12.5000 

6.2500 

2.5000 


900 
900 
900 
900 


24.0570 

11.2500 

5-6250 

2.2500 


412.5000 

192.9000 

96.4500 

38.5800 


371.2500 

173.6100 

86.8050 

34.7220 


$1.0000 
.5000 
.2500 

.IOOO 


Minor  Coins 


Denomi- 
nations 

Weight 

Composition 

Weight 

Legal  Tender 

Value 

nickel 

Grams 

Grains 

5  cents . 

5.0000 

75  per  cent  cop- 
per and  25  per 

77.1600 

To  the  amount 

'  $0.0500 

BRONZE 

cent  nickel. 

of  25  cents. 

1  cent  . 

3-1104 

95  per  cent  cop- 
per, 4  per  cent 
tin,   and    1    per 
cent  zinc. 

48.0000 

.0100 

1  Monetary  unit  (no  longer  coined). 


204 


APPENDIX 


The  act  of  June  9,  1879,  made  the  subsidiary  silver 
coins  of  the  United  States  legal  tender  to  the  amount 
of  $10.  The  minor  coins  are  legal  tender  to  the  amount 
of  25  cents. 

PHILIPPINE   ISLANDS 

The  coinage  of  the  Philippine  Islands  is  authorized 
by  the  acts  of  Congress  of  the  United  States  approved 
March  2,  1903,  and  June  23,  1906,  and  by  the  decrees 
of  the  Philippine  Islands  government  proclaimed  March 
23,  1903,  and  December  6,  1906. 

The  weight  and  fineness  of  the  coins  are  as  follows : 

Silver 


Denominations 

Weight 

Fine- 
ness 

Fine 
Weight 

Weight 

Pure 
Silver 

Con- 
tained 

Value  in 
United 
States 
Money 

Grams 

Thou- 
sandths 

Grams 

Grains 

Grains 

Pesos1    .... 

20.0000 

800 

16.0000 

30S.6400 

246.9120 

$0.50000 

50  centavos     .     . 

10.0000 

75° 

7.5000 

154.3200 

115.7400 

.25000 

20  centavos      .     . 

4.0000 

75° 

3.0000 

61.7280 

46.2960 

.10000 

10  centavos      .     . 

2.0000 

75° 

1.5000 

30.8640 

23.1480 

.05000 

CUBA 

Cuba  is  without  a  national  currency,  paper  money, 
gold,  silver,  or  copper,  of  any  kind. 

Debts  are  payable  in  Cuba  in  the  kind  of  money 
stipulated  in  the  obligation,  and  usually  call  for  United 
States  currency,   Spanish  or  French  gold,  or  Spanish 

1  Legal  tender  in  the  Philippine  Islands  for  all  debts,  public  and  pri- 
vate, unless  otherwise  specifically  stipulated  in  the  contract.  Subsidiary 
silver  coins  are  legal  tender  to  the  amount  of  $10. 


APPENDIX  205 

silver.  United  States  national-bank  notes  are  accepted, 
but  not  the  notes  of  French  or  Spanish  banks. 

The  bonds  of  the  Cuban  Government  are  payable  in 
American  gold,  and  likewise  all  taxes,  duties,  and 
postage  are  collected,  and  the  accounts  of  the  treasury 
and  post  office  department  are  kept  in  United  States 
money. 

In  the  Provinces  of  Santiago  and  Camaguey,  United 
States  money  is  used  almost  exclusively. 

In  the  Provinces  of  Santa  Clara,  Matanzas,  Havana, 
and  Pinar  del  Rio,  custom  dictates  the  use  of  the  differ- 
ent kinds  of  money  in  a  general  way  as  follows  : 

Car  fare,  sales  of  railroad  tickets,  freight  charges,  real 
estate,  tobacco  in  bulk,  and  cigar-makers'  wages  are 
settled  in  American  money. 

Retail  prices  of  articles  selling  for  less  than  $10,  in- 
cluding cigars  and  carriage  hire,  are  quoted  in  Spanish 
silver. 

All  sugar  transactions,  and  other  transactions  of  im- 
portance, including  the  larger  part  of  the  loans  made  by 
the  banks,  are  made  in  Spanish  or  French  gold. 

For  the  purpose  of  domestic  exchange,  the  "luis" 
(Napoleon)  and  "centen"  (Alphonso)  are  arbitrarily 
called  $4.24  and  $5.30  Spanish  gold,  respectively.  As 
the  gold  value  of  the  former  is  $3,859,  and  that  of  the 
latter  is  $4.8238  American  gold,  the  parity  of  an  American 
dollar  is  approximately  $1.09872  in  Cuban  "Spanish 
gold."  This  rate  varies  in  the  market  from  $1.08  to 
$i.iof. 

The  Spanish  silver  coins  in  circulation  are  the  "peso," 
"doble-peseta,"   "peseta,"   and   "real,"   valued    as  $1, 


ao6  APPENDIX 

40  cents,  20  cents,  and  10  cents,  respectively.  There 
are  also  1  and  2 -cent  Spanish  copper  pieces  in  current 
use.  The  "reales"  are  quoted  in  quantities  of  $5  or 
more  at  from  3  per  cent  to  5  per  cent  premium,  and  the 
copper  pieces  from  3  per  cent  to  10  per  cent  premium. 
Spanish  silver  is  quoted  in  "Spanish  gold"  and  fluctuates 
widely.  During  the  past  three  years  the  rate  has 
gradually  approached  100,  the  present  price  being  99I, 
or  approximately  6|  per  cent  discount  from  the  arbitrary 
rate  of  106  "Spanish  gold." 

All  denominations  and  kinds  of  United  States  currency 
are  in  circulation. 

In  addition  to  the  Alphonso  and  Napoleon,  but  not  so 
generally  used,  also  gold  coins  valued  at  $17,  $4.25, 
$2.i2§,  and  $2.12,  known  as  "onzas,"  "escudos,"  "medio- 
escudos,"  and  "medio-luises,"  respectively,  are  in  circula- 
tion. 

GREAT  BRITAIN   AND   COLONIES 

The  sovereign  (pound  sterling),  the  monetary  unit,  is 
a  gold  coin  weighing  7.988  grams,  0.916!  fine,  con- 
taining 7.322  grams,  or  1 13.0016  +  grains  of  pure 
gold. 

The  silver  coins  of  Great  Britain  are  a  legal  tender  for 
40s.  or  £2,  equal  to  $9,732  in  United  States  money.  The 
present  legal  ratio  between  gold  and  silver  in  the  coinage 
of  Great  Britain  is  as  1  to  14.28781. 

The  English  colonies  of  Malta,  Gibraltar,  the  South 
and  West  African  colonies,  the  West  Indies,  and  New 
Zealand  use  the  coins  of  England.  The  Dominion  of 
Canada,  Commonwealth  of  Australia,  and  Nigeria  have 


APPENDIX 


207 


special  silver  and  nickel  coinages,  respectively,  which  are 
only  current  locally.  Fourpences  of  special  design  are 
also  struck  for  circulation  in  the  West  Indies  and  British 
Guiana.  In  Canada  the  gold  coins  of  the  United  States 
and  the  pound  sterling  or  sovereign  are  legal  tender  at 
the  rate  of  $4.86! . 

The  coinage  act  of  1870  shall  apply  to  and  be  in  force 
in  each  of  the  colonies  or  possessions  following  and  their 
dependencies,  namely :  Jamaica  (including  the  Turks 
and  Caicos  Islands),  British  Guiana,  the  Bahamas, 
Trinidad  and  Tobago,  Barbados,  Grenada,  St.  Vincent, 
St.  Lucia,  the  Leeward  Islands,  the  Bermudas,  the 
Falkland  Islands,  Malta,  St.  Helena,  Sierra  Leone, 
Gambia,  the  Gold  Coast,  Lagos,  and  British  New 
Guinea. 

The  weight,  fineness,  etc.,  of  the  coins  of  Great 
Britain  now  issued  are  as  follows : 


Gold 


Denominations 

Weight 

Fine- 
ness 

Fine 
Weight 

Weight 

Pure 

Gold  or 

Silver 

Value  in 
United 
States 
Money 

5  pounds     .     .     . 
2  pounds     .     .     . 
Sovereign    .     .     . 
Half  sovereign 

Grams 

39-94H 

I5-9764 

7.9882 

3-9941 

Thou- 
sandths 

9l6f 
9i6f 
916I 
9i6f 

Grams 

36.6127 

14.6451 

7-3225 

3.6612 

Grains 
616.3723 

246.5489 

123.2744 

61.6372 

Grains 
565.0080 
226.0032 
113.0016 

56.5008 

$24.3325 
9-7330 
4.8665 
2.4332 

208 


APPENDIX 


Silver 


Denominations 


Half  crown  .  . 

Florin     .     .  .  . 

Shilling  .     .  .  . 

Sixpence      .  .  . 
Fourpence  (groat) 

Threepence  .  . 

Twopence    .  .  . 

Penny     .     .  .  . 


Weight 


Grams 
14.1382 
II. 3106 

5-6553 
2.8276 
1.8851 
1.4138 
•942  5 
.4712 


Fine- 
ness 


Thou- 
sandths 

925 
925 
925 
925 
925 
925 
925 
925 


Fine 
Weight 


Crams 
13.0779 
10.4623 

5-23II 
2.6155 

1-7437 

1.3077 

.8718 

•4359 


Weight 


Grains 
218.1818 

174-5454 
87.2727 
43-6363 
29.0909 
21.8181 

14-5454 

7.2727 


Pure 
Gold  or 
Silver 


Grains 
201.8181 
161.4545 
80.7272 
40.3636 
26.9090 
20.1818 

13-4545 
6.7272 


Value  in 
United 
States 
Money 


$0.6083 
.4866 

•2433 
.1216 
.0811 
.0608 
.0405 
.0202 


CANADA 

The  Dominion  of  Canada,  including  the  Provinces  of 
Prince  Edward  Island,  Nova  Scotia,  New  Brunswick, 
Quebec,  Ontario,  Manitoba,  British  Columbia,  Alberta, 
Saskatchewan,  Yukon,  and  Northwest  Territories,  has  a 
monetary  system  established  under  "The  Currency  Act, 
1910,"  assented  to  by  Edward  VII,  May  4,  1910,  by  and 
with  the  consent  of  the  Senate  and  House  of  Commons 
of  Canada.1 

The  standard  is  gold,  and  coinage  upon  the  decimal 
system  in  dollars  and  cents.  United  States  gold  coins 
and  the  British  sovereign  are  legal  tender,  the  latter  at 
the  rate  of  $4.86f. 

The  weight,  fineness,  etc.,  of  the  coins  of  Canada  are 
as  follows : 

1  The  currency  act,  chapter  25,  of  the  Revised  Statutes,  1906,  is 
repealed. 


APPENDIX 

Gold 


209 


Denominations 

Weight 

Fine- 
ness 

Fine 
Weight 

Weight 

Pure 
Gold  or 
Silver 

Value  in 
United 
States 
Money 

20  dollars    .     .     . 

10  dollars    .     .     . 

5  dollars    .     .     . 

2\  dollars    .     .     . 

Grams 

33-437° 

16.7185 

8.3592 

4.1796 

Thou- 
sandths 

900 
900 
900 
900 

Grams 

30-0933 
15.0466 

7-5232 
3.7616 

Grains 
516.0000 
258.0000 
129.0000 

64.5000 

Grains 

464.4000 

232.2000 

116. IOOO 

58.0500 

$20.0000 

10.0000 

5.0000 

2.5000 

Silver 


Dollar     .... 

23-3281 

925 

21.5784 

360.0000 

333.0000 

$1.0000 

50  cents       .     .     . 

11.6640 

925 

10.7892 

180.0000 

166.5000 

.5000 

25  cents       .     .     . 

5-8320 

925 

5-3946 

90.0000 

83.2500 

.2500 

10  cents       .     .     . 

2.3328 

925 

2.1578 

36.0000 

33.3000 

.1000 

5  cents  .... 

1. 1664 

925 

1.0789 

18.0000 

16.6500 

.0500 

LATIN   UNION   COUNTRIES 
France,  Belgium,  Switzerland,  Greece,  and  Italy 

(Spain  has  the  same  gold  and  silver  coins  as  the 
Union.) 

The  actual  value  of  the  French  gold  franc  in  the 
money  of  the  United  States  as  declared  by  the  director  of 
the  United  States  mint  is  19  and  3-ioths  cents ($0.1 93). 
Francs  are  the  currency  of  the  countries  forming  the 
Latin  Union,  a  union  formed  for  the  adoption  of  a  uni- 
form monetary  system,  comprising  France,  Belgium, 
Switzerland,  Greece,  and  Italy.  France,  Belgium,  and 
Switzerland  call  their  unit  the  " franc."  Greece  calls 
its  unit  the  "drachma,"  and  Italy  the  "lire."     The  free 


2IO 


APPENDIX 


circulation  of  gold  and  silver  coins  issued  by  the  coun- 
tries named  was  further  ratified  at  the  convention  held 
at  Paris,  France,  November  15th,  1893.  By  this  con- 
vention, ratifying  the  original  arrangement,  the  gold 
and  silver  coins  issued  by  each  of  the  above-mentioned 
countries  were  granted  free  and  unlimited  circulation 
at  face  value  in  the  countries  forming  the  Latin  Union. 
The  weight,  fineness,  etc.,  of  the  coins  are  as  follows : 

Gold 


Denominations 

Weight 

Fine- 
ness 

Fine 
Weight 

Weight 

Pure 
Gold  or 
Silver 

Value  in 
United 

States 
Money 

Thou- 

Grams 

sandths 

Grains 

Grains 

Grains 

100  francs 1      .     . 

32.2580 

900 

29.0322 

497.8054 

448.0249 

$19.2947 

50  francs      .     .     . 

16.1290 

900 

14.5161 

248.9027 

224.0124 

9-6475 

20  francs 

6.4516 

900 

5.8064 

99.5610 

89.6049 

3-8589 

10  francs     .     .     . 

3-2258 

900 

2.9032 

49.7805 

44.8024 

1.9294 

5  francs     .     .     . 

1. 6129 

900 

1.4516 

24.8902 

22.4012 

.9647 

Silver 


5  francs 
2  francs 
1  franc    .     . 
50  centimes 
20  centimes 


25.0000 

900 

22.5000 

385.8000 

! 
347.2200 

10.0000 

835 

8.3500 

154.3200 

128.8572 

5.0000 

835 

4-1750 

77.1600 

64.4286 

2.50CO 

835 

2.0875 

38.5800 

32-2143 

1 .0000 

835 

•8350 

15-4320 

12.8857 

$0.9647 

•3858 

.1929 

.0964 

•0385 


GERMAN    EMPIRE 

The  fundamental  law  of  the  present  monetary  system 
of  Germany  is  that  of  June  1,  1909,  abrogating  the  law 


1  In  Italy,   lire  and  centesimi. 
In  Spain,  pesetas  and  centimos. 


In    Greece,   drachmas   and  lepta. 


APPENDIX 


211 


of  December  4,  187 1,  regulating  the  striking  of  gold 
coins  in  the  Empire,  the  monetary  laws  of  July  9,  1873, 
June  1,  1900,  and  May  19,  1908,  modifying  the  monetary 
system.  All  references  to  the  arrangements  of  the 
abrogated  laws  are  replaced  by  the  corresponding  ar- 
rangements of  this  law. 

The  standard  is  gold  monometallic,  and  the  monetary 
unit  the  mark  of  100  pfennigs.  Silver  is  legal  tender  to 
the  amount  of  20  marks. 

The  weight,  fineness,  etc.,  of  the  gold  coins  of  the 
German  Empire  are  as  follows : 

Gold 


Denominations 

Weight 

Fine- 
ness 

Fine 
Weight 

Weight 

Pure 
Gold  or 
Silver 

Value  in 
United 
States 
Monev 

Double  crown  (20 

marks)     .     .     . 

Crown  (10  marks) 

Grams 

7.9649 
3-9824 

Thou- 
sandths 

900 
900 

Grams 

7.1684 

3-5842 

Grains 

122.9151 
61.4575 

Grains 

110.6236 
55-3"8 

$4-7641 
2.3S18 

Silver 


5  marks 

27.7777 

900 

25.0000 

428.6655 

385.8000 

$1.1909 

3  marks     .     .     . 

16.6666 

900 

1 5 .0000 

257.0971 

231.4800 

•7H3 

2  marks     .     .     . 

ii.iiii 

900 

10.0000 

171.4650 

154.3200 

.4762 

1  mark       .     .     . 

5-5555 

900 

5 .0000 

85-7325 

77.1600 

.2381 

50  pfennigs     .     . 

2.7777 

900 

2.5000 

42.8663 

38.5800 

.1190 

NORWAY,    SWEDEN,   AND  DENMARK   (Scandinavian 

Union) 

The  Scandinavian  Monetary  Union  embraces  Norway, 
Sweden,  and  Denmark,  and  the  value  of  the  gold  krone 


2X2 


APPENDIX 


or  crown  in  the  money  of  the  United  States,  as  declared 
by  the  director  of  the  United  States  mint,  is  26  and 
8-ioth  cents  ($0,268).  The  commercial  value  of  the 
krone  (plural  kronor)  in  the  United  States  fluctuates 
according  to  the  demand  for  checks,  drafts,  and  bills  of 
exchange  on  these  countries,  and  the  supply  of  such 
exchange  in  the  market  for  sale.  Silver  coins  are  legal 
tender  as  follows :  The  2 -kronor  and  1 -krone  pieces  to 
the  amount  of  20  kronor;  the  50,  40,  25,  and  10  ore 
pieces  to  the  amount  of  5  kronor.  The  money  in  cir- 
culation consists  of  paper  currency  and  gold,  silver,  and 
bronze  coins,  the  weight,  fineness,  etc.,  of  coins  and  the 
equivalent  value  in  the  money  of  the  United  States, 
being  as  follows: 


Gold 


Denominations 

Weight 

Fine- 
ness 

Fine 
Weight 

Weight 

Pure 
Gold  or 

Silver 

Value  in 
United 
States 
Money 

20  crowns    .     .     . 
10  crowns    .     .     . 
5  crowns      .     .     . 

Grams 
8.9606 
4.4803 
2.2401 

Thou- 
sandths 

900 
900 
900 

Grams 

8.0645 

4-0323 
2.0161 

Grains 

138.2799 

69.1399 

34-5699 

Grains 

124.4513 

62.2249 
31-1124 

$5-3596 
2.6797 
1-3398 

Silver 


2  crowns 
1  crown 
50  ore     . 
25  ore 
10  ore 


15.0000 
7.5000 
5.0000 
2.4200 
1.4500 


800 
800 
600 
600 
400 


12.0000 

6.0000 

3.0000 

1.4520 

.5800 


231.4800 

115.7400 

77.1600 

37-3454 
22.3764 


185.1840 

92.5920 

46.2960 

22.4072 

8.9505 


3-5359 
.2679 

•1339 

.0669 
.0267 


APPENDIX 


213 


NETHERLANDS 

Holland  is  usually  classed  as  a  double-standard 
country.  It  would  be  more  correct  to  say  that  it  has 
a  gold  standard  conjointly  with  the  circulation,  as  a 
legal  tender,  of  the  rixdaler,  gulden,  and  half  gulden. 

The  fundamental  monetary  law  of  the  Netherlands 
at  the  present  time  is  that  of  May  28,  1901,  altered  by 
the  law  of  December  31,  1906. 

A  bill  was  passed  in  1875  (June  6)  opening  the  mint 
to  the  public  for  the  coinage  of  gold,  making  the  new 
standard  coin  a  10-florin  gold  piece,  weighing  6.048 
grams  of  fine  gold,  thus  establishing  the  ratio  in  coinage 
of  gold  to  silver  of  1  to  15.625. 

The  monetary  system  of  the  Dutch  colonies  is  the 
same  as  that  of  the  mother  country. 

The  weight,  fineness,  etc.,  of  the  coins  of  the  Nether- 
lands are  as  follows : 

Gold 


Denominations 

Weight 

Fine- 
ness 

Fine 
Weight 

Weight 

Pure 
Gold  or 
Silver 

Value  in 
United 
States 
Money 

10  florins     .     .     . 
Ducat1  .... 

Grams 

6.7200 
3-4940 

Thou- 
sandths 

900 

983 

Grams 

6.0480 
3-4346 

Grains 

103.7030 
53.9194 

Grains 

93-332  7 

53-0027 

$4.0195 
2.2826 

Silver 


2\  florins     .     .     . 

25.0000 

945 

23.6250 

385.8000 

364.5810 

$1.0048 

Florin     .... 

10.0000 

945 

9.4500 

154.3200 

145-8324 

.4019 

\  florin   .... 

5.0000 

945 

4-725o 

77.1600 

72.9162 

.2097 

25  cents      .     .     . 

3-57SO 

640 

2.2880 

55-1694 

35-3o84 

.1004 

10  cents       .     .     . 

1.4000 

640 

.8960 

2 1 .6048 

13-8270 

.0401 

1  Trade  coin. 


214 


APPENDIX 


AUSTRIA-HUNGARY 

The  fundamental  text  is  the  law  of  August  2,  1892. 
The  new  monetary  system  is  gold,  monometallic,  and 
the  legal  monetary  unit  is  the  crown  (0.3387533  gram 
fine),  which  is  divided  into  100  hellers  (farthings). 

Besides  the  pieces  of  the  crown  system  there  may  be 
coined,  for  individual  account,  gold  ducats  and  silver 
thalers  (Maria  Theresa  type  of  1780),  but  these  pieces 
have  no  lawful  currency.  The  gold  coins  of  the  crown 
system  may  be  coined  for  individual  account  and  have 
unlimited  currency. 

The  weight,  fineness,  etc.,  of  the  coins  of  Austria- 
Hungary  are  as  follows : 

Gold 


Denominations 

Weight 

Fine- 
ness 

Fine 
Weight 

Weight 

Pure 

Gold  or 

Silver 

Value  in 
United 
States 
Money 

100  crowns      .     . 
20  crowns    .     .     . 
10  crowns    .     .     . 
4  ducats      .     .     . 
Ducat  (Austrian) J 

Grams 

33-8753 
6.7750 

3-3875 
13.9636 

3-4909 

Thou- 
sandths 

900 

900 

900 

986I 

986^ 

Grams 

30.4878 
6.0975 
3.0487 

13.7696 
3-4424 

Grains 

522.7636 
104.5218 

52.2759 
215.4862 

53-87I5 

Grains 

470.4872 
94.0696 
47.0483 

212.4933 
53-1233 

$20.2623 
4.0524 
2.0262 
9.1508 

2.2877 

Silver 


5  crowns     .     .     . 

24.0000 

900 

21.6000 

370.3680 

333-3312 

$1.0130 

Florin     .... 

12.3457 

900 

n. mi 

190.5188 

171.4664 

.4052 

2  crowns     .     .     . 

10.0000 

835 

8.3500 

154.3200 

128.8572 

.4052 

1  crown       .    .     . 

5.0000 

835 

4.1750 

77.1600 

64.4286 

.2026 

Maria       Theresa 

thaler2    .     .     . 

28.0668 

833! 

23.3889 

433.1268 

360.9375 

.8545 

20  kreutzers     .     . 

2.6666 

500 

i-3333 

41-1509 

20.5754 

.0810 

10  kreutzers     .     . 

1.6666 

400 

.6666 

25.7189 

10.2869 

.0405 

1  Trade  coin,  equivalent  to  11.29  crowns. 


2  Trade  coin. 


APPENDIX 


215 


RUSSIA 

The  Russian  monetary  system  is  based  on  gold  (law 
of  June  7-19,  1899).  The  monetary  unit  is  the  gold 
ruble,  0.774234  gram  fine,  containing  17.424  doli.  The 
ruble  is  divided  into  100  kopecks. 

Only  the  gold  coins  have  unlimited  lawful  currency, 
and  the  coinage  of  gold  alone  is  free. 

The  weight,  fineness,  etc.,  of  the  coins  of  Russia  are 
as  follows : 

Gold 


Denominations 

Weight 

Fine- 
ness 

Fine 
Weight 

Weight 

Pure 
Gold  or 

Silver 

Value  in 
United 
States 
Money 

Grams 

Thou- 
sandths 

Crams 

Grains 

Grains 

15     rubles     (im- 

perial)     .     .     . 

12.9039 

900 

11.6135 

199.1329 

179.2195 

$7-7i83 

10  rubles     .     .     . 

8.6026 

900 

7-7423 

132.7553 

1 19.4791 

5-1455 

7§  rubles   (5   im- 

perial)     .     .     . 

6.4519 

900 

5.8067 

99-5657 

89.6089 

3-859I 

5  rubles       .     .     . 

4-30I3 

900 

3.8711 

66.3776 

59.7388 

2.5727 

Silver 


1  ruble    .... 

19-9957 

900 

17.9961 

308.5736 

277.7158 

$0.5145 

50  kopecks  . 

9.9978 

900 

8.9980 

154.2860 

138.8571 

•  2572 

25  kopecks  . 

4.9989 

900 

4.4990 

77-1430 

69.4285 

.1286 

20  kopecks  . 

3-5992 

500 

1.7996 

55-5429 

27.7714 

.1029 

15  kopecks  . 

2.6994 

500 

1-3497 

41.6571 

20.8285 

.0771 

10  kopecks  . 

1.7996 

500 

.8998 

27.7714 

13-8857 

•0514 

5  kopecks  . 

.8998 

500 

•4499 

13-8857 

6.9428 

■0257 

JAPAN 

By  a  law  which  went  into  operation  October  1,  1897, 
Japan  adopted  the  single  gold  standard.     The  coinage 


2l6 


APPENDIX 


unit  is  2  fun  (11.574  grains  of  pure  gold)  —  that  is, 
one-half  of  the  former  unit. 

The  former  i-yen  silver  coins,  although  at  first  given 
unrestricted  currency  at  the  value  of  the  new  gold  yen, 
have  since  been  retired. 

The  notes  of  the  bank  of  Japan  compose  the  paper 
currency.     The  gold  standard  is  maintained. 

The  weight,  fineness,  etc.,  of  the  coins  of  Japan  are  as 
follows : 

Gold 


Denominations 

Weight 

Fine- 
ness 

Fine 
Weight 

Weight 

Pure 
Gold  or 
Silver 

Value  in 
United 
States 
Money 

20  yen    .... 

5  yen           ... 

Grams 

16.6666 

8-3333 
4.1666 

Thou- 
sandths 

900 
900 
900 

Grams 

15.OOOO 
7.5000 
3-7SOO 

Grains 

257.1989 

128.5994 

64.2997 

Grains 

231.4800 

115.7400 

57.8700 

$9.9689 
4.9844 
2.4921 

Silver 


50  sen 
20  sen 
10  sen 


10.1250 
4.0500 
2.2500 


800 
800 
720 


8.1000 
3.2400 
1.6200 


156.2490 
62.4996 
34.7220 


124.9992 
49.9996 
24.9998 


$0.2492 
.0996 
.0498 


INDEX 


Acceptance  and  payment  bills  com- 
pared, 46. 

Acceptance  bills,  34,  44. 

Arbitrage,  171;  how  conducted,  172; 
what  makes  it  possible,  173;  effect 
on  exchange  rates,  174. 

Austria-Hungary,  currency  of,  214. 

B 

Bailee  receipts,  127. 
Banker,  foreign  exchange,  2,  3,  55. 
Bankers'  checks,  illustration  of,  96. 
Bankers'      credits      (see     Commercial 

credits). 
Belgium,  currency  of,  209. 
Borrowing  abroad  (see  Sterling  loans). 
Borrowing  and  lending  facilities,  60,  61. 
Broker,  foreign  exchange,  56. 


Cable  transfers,  39,  49. 

Canada,  currency  of,  208. 

Centime,  210. 

Classification  of  bills  of  exchange,  39. 

"Clean"  bills,  41. 

Coin  and  bars  in  gold  shipments,  80. 

Collection  of  drafts  on  foreign  points, 
155-161. 

Commercial  credits  for  exports,  138- 
146;  how  issued,  139;  sterling  vs. 
dollar  credits,  140;  the  banker's 
protection,  141 ;  usance  of  drafts, 
142,  143 ;  cash  against  documents, 
143-146. 

Commercial  credits,  for  exports  and 
imports,  109—154;  theory  of,  108, 
109;  illustration  of,  110,  148. 


21 


Commercial  credits  for  imports,  how 
issued,  112;  agreement  signed  by 
importer,  113;  cabled  confirmations, 
115;  sterling  vs.  dollar  credits, 
116,  117;  how  used  by  shipper,  118— 
120;  acceptances  under,  121 ;  docu- 
ments, 122;  terms  on  which  docu- 
ments are  delivered,  123-131;  trust 
receipts,  illustrated,  125,  127,  129, 
130 ;  special  arrangements  with  im- 
porter, 126;  prepayment  of  accep- 
tances, 131 ;    cost  to  importer,  134- 

135- 
Commercial   credits   issued  in  dollars, 

147  ;   agreement  signed  by  importer, 

149;  advantages  of,  150-152;  future 

of,  152-154. 
Commercial  credits,  other  types,  137. 
Conversions : 

English  Money:  Table,  181;  Addi- 
tion, 182;  Multiplication,  182; 
Subtraction,  182;  Division,  183; 
Reduction  to  decimals,  183;  Into 
U.  S.  money,  183,  185;  U.  S. 
money  into  English  money,  184; 
Interest  or  percentage,  186,  188; 
Interest,  187  ;  Importations,  188. 

French,  Belgian,  and  Swiss  Money : 
Into  U.  S.  money,  190,  191-193, 
194;  U.  S.  money  into  French, 
Belgian,  Swiss  money,   190,    192- 

195- 
German  Money:   Into  U.  S.  money, 
196,    197,    198,   200,   202 ;     U.  S. 
money  into  German  money,  197, 
198,  199,  201,  202. 
Credit    element    as    price-determining 
factor,  commercial  bills,  47,  52,  53; 
bankers'  bills,  48. 
Crown  (Austria-Hungary),  214. 

7 


2l8 


INDEX 


Crown  (Germany),  an. 

Crown  (Scandinavian  Union),  212. 

Cuba,  currency  of,  205. 

D 

Demand    bills,    price    relationship   to 

other  usances,  50. 
Denmark,  money  of,  211. 
Different  kinds  of  exchange,  30-46. 
Dime,  203. 

Discount  market,  in  London,  impor- 
tance of,  10-11;   New  York,  12-13; 

London,  and  long  bills,  87. 
Documentary  commercial  bills,  41,  42. 
Documents,   for  acceptance,   43,    44; 

payment,  43-46. 
Dollar    (American),    203;     (Canada), 

200. 
Dollar  credits  (see  Commercial  credits) . 
Dollar  drafts  on  foreign  points,    155 ; 

interest  and  charges,  157;    the  rate 

of  exchange,  159-161. 
Double  crown  (Germany),  211. 
Double  eagle,  203. 
Drachma,  209. 


Eagle,  203. 

Export      credits      (see      Commercial 

credits). 
Exports  of  merchandise,  15,  16,  25,  26; 

of  securities,  16,  17,  27. 


Finance  bills,  102-107. 
Fineness  of  coins,  203-216. 
Florin  (Holland),  213. 
Franc,  209. 

France,  currency  of,  209. 
Function  of  foreign  exchange  bankers, 
2,  3,  163,  169. 

G 

Germany,  currency  of,  210. 

Gold,  relation  to  trade  balances,  72, 
73;  international  movements  of, 
7°>  7i,  75 ;  market  in  U.  S.,  74; 
market  abroad,  75;   exports,  direct, 


how  figured,  76-78 ;  imports,  direct, 
how  figured,  79;  exports  and  im- 
ports, indirect,  81,  82  ;  exports  and 
imports,  obstruction  of,  83. 

Great  Britain  and  colonies,  currency 
of,  206,  207. 

Greece,  currency  of,  209. 

H 

Higher  rates  of  interest  in  one  market 

than  another,  62,  63. 
High  money  rates,  effect  on  exchange, 

64,  68. 


Import      credits       (see     Commercial 

credits). 
Imports,  of  merchandise,    19,   20,   25, 

26;  securities,  20,  21,  27. 
Interest  (see  Money  market). 
Interest  and  dividend  remittances,  22  ; 

effect  on  exchange,  31. 
Interest  as  a  factor  in  gold  exports,  77  ; 

in  gold  imports,  80. 
International  payments,  how  made,  2. 
International  services,  rendered  by  us, 

19;  rendered  to  us,  23. 
Italy,  currency  of,  209. 


Japan,  currency  of,  215. 


Krone  (Scandinavian  Union),  212. 


Latin-Union,  currency  of,  209. 

Lire,  209. 

Long  bills,  defmed  and  described, 
40,  85 ;  theory  on  which  drawn,  84, 
85 ;  illustration,  86 ;  privilege  of 
drawing,  86;  classified,  88;  pur- 
poses for  which  drawn,  88;  drawn 
against  non-discountable  commercial 
bills,  88,  89 ;  drawn  against  futures, 
90 ;  drawn  in  the  making  of  sterling 


INDEX 


219 


loane,  91,  92;  finance  paper,  102- 
107 ;  issued  to  pay  for  securities,  103 ; 
issued  to  take  advantage  of  ex- 
change rates,  105  ;  issued  for  capital 
purposes,  106,  107. 
Low  money  rates,  effect  on  exchange 
market,  66—68. 

M 

Mark,  211. 

Market  for  foreign  exchange,  54,  55; 
outside  of  New  York,  57. 

Monetary  systems  of  the  world's  princi- 
pal countries,  203-216. 

Money  market,  influence  on  exchange 
rates,  64-69. 

Movement  of  exchange,  24-32. 

N 

Netherlands,  currency  of,  213. 

New  York,   relation  to  other  money 

markets,  10,  58,  59. 
Norway,  currency  of,  211. 


Par  of  exchange,  defined,  8;  how 
found,  8 ;  Great  Britain  and  U.  S., 
7,  8;  relation  to  actual  rates,  9; 
U.  S.  and  other  countries,  203-216. 

Payment  and  acceptance  bills  com- 
pared, 46. 

Payment  bills,  43—46. 

Pesos  (Philippine),  204. 

Philippine  Islands,  currency  of,  204. 

Pound  sterling,  207. 

Price  relationship  of  various  usances, 

So-53- 

Prime  bills,  48. 

Profit  in  foreign  exchange,  163,  174; 
selling  cables  against  cables,  163 ; 
selling  demand  against  demand,  164  ; 
element  of  risk,  165,  166;  selling 
cables  against  short,  167 ;  selling 
short  against  long,  168;  speculative 
operations,  171 ;  arbitrage,  171-174. 


Rate  of  exchange,  defined,  1,  25; 
influence  of  supply  and  demand,  4; 
a  two-ended  affair,  5 ;  New  York- 
London,  33;  New  York-Berlin,  34; 
New  York-Paris,  35-37 ;  how  es- 
tablished, 49;  rise  and  fall  of,  25- 
32. 

Rebate,  payment  bills,  45. 

Reichsmark,  211. 

Remittances,  by  foreigners  resident 
in  U.  S.,  24. 

Ruble,  215. 

Russia,  currency  of,  215. 


Scandinavian  Union,  currency  of,  211. 

Silver,  coin  regarded  as  bullion,  175; 
price  and  the  exchange  rate,  176; 
exchange  quoted  in  gold,  177;  ex- 
change, movement  of,  177,  179; 
prices  and  foreign  trade,  178-180. 

Silver  exchanges,  175. 

Sovereign,  207. 

Sterling,  most  used  currency,  12,  14. 

Sterling  loans,  91 ;  deposit  of  collat- 
eral, 92 ;  the  risk  of  exchange,  93, 
96;  what  the  borrower  pays,  94, 
97 ;  renewals,  95 ;  currency  basis, 
97 ;  profit  in  making,  98 ;  par- 
ticular advantages  of,  99. 

Supply  of  exchange,  15-19- 

Sweden,  currency  of,  211. 

Switzerland,  currency  of,  209. 


Trust  receipts,   123-131 ;   illustrations 
of,  125,  127,  129,  130. 


United  States,  currency  of,  203. 
Usance,  43. 


Yen,  216. 


Printed  in  the  United  States  of  America. 


JHE  following  pages  contain  advertisements  of  a 
few  of  the  Macmillan  books  on  kindred  subjects 


The  Value  of  Money 


By  B.  M.  ANDERSON,  Jr.,  Ph.D. 

Assistant  Professor  of  Economics,  Harvard  University 
Author  of  "  Social  Value  " 


Cloth,  i2mo,  xxviii  +  6 10  pp.,  Index,  $2.25 


Convinced  of  the  fact  that  the  value  of  money  cannot  be  studied  suc- 
cessfully as  an  isolated  problem,  the  author  of  this  text  considers  virtually 
the  whole  range  of  economic  theory  in  connection  with  the  conclusions 
he  reaches  concerning  the  central  problem  of  this  book.  The  following 
topics  are  discussed:  the  general  theory  of  value;  the  role  of  money  in 
economic  theory  and  the  functions  of  money  in  economic  life;  the  value 
of  money  in  relation  to  the  law  of  supply  and  demand,  in  relation  to  the 
doctrine  of  cost  of  production,  and  in  relation  to  the  capitalization  theory; 
the  theory  of  the  values  of  stocks  and  bonds,  of  "  good  will,"  established 
trade  connections,  trade-marks,  and  other  "intangibles";  the  theory  of 
credit,  including  the  relations  of  credit  to  value  and  of  credit  to  money; 
the  causes  governing  the  volume  of  trade,  and  particularly  the  place  of 
speculation  in  the  volume  of  trade;  the  relation  of  "static"  economic 
theory  to  "  dynamic  "  economic  theory. 

In  addition  to  the  theoretical  matter,  which  is  keen,  original  and  most 
ably  presented,  there  is  a  large  amount  of  new,  unpublished,  practical 
material  regarding  the  workings  of  the  stock  market,  the  money  market, 
the  general  range  of  speculation  and  the  measurement  of  the  volume  of 
trade,  etc. 

The  book  will  be  of  interest  to  college  and  university  students,  espe- 
cially in  view  of  the  fact  that  the  economic  theory  which  it  advances  is 
a  challenge  to  the  existing  theories  on  the  subject. 


THE  MACMILLAN  COMPANY 

Publishers  64-66  Fifth  Avenue  New  York 


Readings  in  Money  and  Banking 

By  CHESTER  A.  PHILLIPS 
Assistant  Professor  of  Economics  in  Dartmouth  College 

Cloth,  8vo,  84.5  pp.,  $2.10 

"In  this  remarkable  volume  Prof.  Phillips  has  co-ordinated 
into  a  continuous  and  logical  course  of  reading  the  most 
valuable  writings  of  authorities  on  money  and  banking  of 
the  past  and  present,  from  books,  addresses  and  contribu- 
tions to  the  various  economic  reviews.  The  publications  of 
the  National  Monetary  Commission,  also,  have  been  drawn 
upon,  enabling  the  reader  to  obtain  material  which  he  might 
otherwise  have  to  dig  out  for  himself  from  the  40  volumes  of 
the  Commission's  report,  for  which  the  government  charges 
$40.  Prof.  Phillips's  book  is,  in  fact,  a  library  in  itself.  How 
complete  a  library  it  is  one  may  judge  from  some  of  the  chap- 
ter headings:  The  Origin  and  Functions  of  Money;  The  Early 
History  of  Money;  Legal  Tender;  Greenbacks;  Bimetallism; 
Index  Numbers;  The  Use  of  Credit  Instruments;  Relation 
between  Money  and  Prices;  The  Gold  Exchange  Stand- 
ard; Irving  Fisher's  Plan  for  a  Compensated  Dollar;  Mone- 
tary Systems  of  Foreign  Countries;  Domestic  Exchange; 
Foreign  Exchange;  Clearing  Houses;  Saving  Banks;  Trust 
Companies;  The  Canadian  Banking  System;  The  Bank  of 
England;  The  Bank  of  France;  The  Bank  of  Germany;  The 
Concentration  of  Money  and  Credit;  The  Federal  Reserve 
System;  The  Effect  of  the  European  War  on  Money:  Banking 
and  Finance.  Altogether  the  book  is  one  which  we  can  com- 
mend without  hesitation  to  all  students  of  money  and  bank- 
ing."   Moody's  Magazine,  N.  Y. 


THE   MACMILLAN    COMPANY 

Publishers         64-66  Fifth  Avenue         New  York 


Modern  Currency  Reforms 

By  EDWIN  W.  KEMMERER,  Ph.D. 

Professor  of  Economics  and  Finance  in  Princeton 

University 

Cloth,  crown  8vo,  xxi  +  564  pages,  $2.40 

"Modern  Currency  Reform"  is  a  notable  addition  to 
our  rather  limited  list  of  authoritative  books  on  this 
subject;  it  is  one  that  the  true  student  of  economics  can  ill 
afford  to  pass  by. — The  Financier,  New  York. 

"No  one  can  afford  to  be  ignorant  of  these  object  lessons 
of  how  prices,  taxes,  wages,  and  contracts  of  indebtedness 
are  affected  by  such  reforms." — New  York  Times. 

"The  material  of  the  book  has  been  in  process  of  col- 
lection and  preparation  by  the  author  for  a  period  cover- 
ing thirteen  years,  nearly  three  of  which  he  spent  as  a 
government  official  in  countries  whose  currency  reforms 
are  described.  He  is  peculiarly  fitted,  therefore,  as  the 
historian  of  the  movements  he  details,  and  the  on-the- 
ground  character  of  his  investigation  makes  the  work  the 
more  valuable  and  interesting  to  students  of  finance." — 
Daily  Financial  American. 


THE   MACMILLAN    COMPANY 

Publishers         64-66  Fifth  Avenue         New  Yon. 


Forecasting  the  Yield  and  the  Price  of  Cotton 

By  HENRY  LUDWELL  MOORE 

Professor  ©f  Palitical  Ecenomy  in  Columbia  University 

In  press.    Cloth,  i2mo,  about  220  pages 


The  chief  aim  of  this  volume  is  to  make  a  contribution  to 
economic  science  by  showing  that  the  changes  in  the  great 
basic  industry  of  the  South  which  dominate  the  whole  eco- 
nomic life  of  the  Cotton  Belt  are  so  much  a  matter  of  routine 
that,  with  a  high  degree  of  accuracy,  they  admit  of  being 
predicted  from  natural  causes.  In  this  work  the  author  shows 
how,  by  means  of  principles  and  methods  which  he  describes 
fully,  it  is  possible  for  any  person  (1)  from  the  current  re- 
ports of  the  Weather  Bureau  as  to  rainfall  and  temperature 
in  the  states  of  the  Cotton  Belt,  to  forecast  the  yield  of  cotton 
with  a  greater  degree  of  accuracy  than  the  forecasts  of  the 
Department  of  Agriculture,  and  (2)  from  the  prospective 
magnitude  of  the  crop,  to  forecast  the  probable  price  per 
pound  of  cotton  with  a  greater  precision  than  the  Department 
of  Agriculture  forecasts  the  yield  of  the  crop. 

Because  of  the  huge  financial  importance  of  an  accurate 
method  of  forecasting  cotton  crops,  this  volume  will  make  an 
appeal  to  the  business  man.  The  concise  elementary  exposi- 
tion of  statistical  methods  which  are  immediately  used  to 
solve  an  economic  problem  of  the  first  importance  will  be  of 
interest  to  teachers  both  of  statistics  and  of  economic  theory. 


THE   MACMILLAN   COMPANY 

Publishers  64-66  Fifth  Avenue  New  York 


Statistical  Methods 


By  HORACE   SECRIST 

Assistant  Professor  of  Economics  in  Northwestern  University 

With  diagrams,  Cloth,  i2mo,  482  pp.     $2.00 

The  purpose  of  this  book  is  to  supply  the  need  for  a  com- 
prehensive treatment  of  the  methods  of  statistical  investi- 
gation and  interpretation.  The  book  is  designed  as  a  text 
for  students  in  colleges  and  in  schools  of  business  adminis- 
tration, as  well  as  a  guide  for  public  and  private  statistical 
offices  and  for  the  business  man.  The  functions  of  statistical 
methods  are  fully  discussed,  and,  by  means  of  rules  and 
cautions,  good  and  bad  statistical  practices  are  clearly  differ 
entiated.  The  author  not  only  develops  the  principles  in  a 
comprehensive  way,  but  at  the  same  time  formulates  a  manual 
of  procedure  which  will  be  helpful  to  all  those  who  may  use 
statistics  or  its  methods  in  private  or  public  fields.  The 
treatment  covers  all  stages  of  analysis  from  the  oollecting 
and  assembling  of  crude  data  to  their  use  and  interpretation 
as  a  finished  product.  The  author  regards  statistics  as  a 
means  and  not  as  an  end,  and  discusses  all  of  the  problems 
encountered  in  the  development  of  a  statistical  judgment. 


THE   MACMILLAN   COMPANY 

Publishers  64-66  Fifth  Avenue  New  York 


This  book  is  DUE  on  the  last  date  stamped  below 


MAR  11 193$ 
OCT 


C\-c< 


nO 


<0> 


w  (il 


Form  L-9-15m-7,'31 


OCT  07  1991 

NOV    4  199 


V-' 


158  00734  8203 


UC  SOUTHERN  REGIONAL  LIBRARY  FACILITY 


AA    001  145  942    7 


I 


